Bankers plans to hike lending rates with inflation touching 11.05%

The wholesale price index (inflation) has touched 11.05% for the week ended June 7-highest in 13 years and earlier the Reserve Bank of India in order to control inflation had hiked repo rate following this bankers are planning to increase both lending and deposit rates in the next one month. Another hike in interest rates by the central bank looks on the cards.

The RBI will be holding its quarterly policy review on July 29, after this bankers are expecting a hike in repo rate (at which RBI lends money to other banks) or the cash reserve ratio (the amount banks have to park with the central bank) by 0.25-0.50 percentage points again.

Although most bankers have refused to commit on possible rate hikes, but on seeing the recent trends in the banking sector there are indications of increase in interest rates.

The smaller banks like Jammu & Kashmir Bank and Yes Bank, have already increase PLR rates now the larger have also started feeling the pinch of the RBI's rate hikes.

In fact, HDFC Bank, the third-biggest bank by market value, has raised its main lending rate by 25 basis points to 15.25% effective from June 18. The bank has also increased its deposit rates by 25 bps.

"Our cost of funds has gone up by 50 basis points in the last one year," an official said, explaining the rational behind the lending hike.

HDFC Bank stands at the fourth place who have hiked interest rates after the Jammu & Kashmir Bank upped its main lending rate by whopping 100 basis points (1%) to 14% last week and Yes Bank's 50 basis points hike to 16% on Monday.

Yes Bank has hiked its rates for one year to 18 months' deposits by 50 basis points to 9.50%. Kolkata-based United Bank of India (UBI) hiked deposit rates by 25 to 75 basis points.

Increase in inflation at 11.05% means that investors are losing money on deposits. The average rate on one-year fixed deposits is 8.5%, which means a loss of 2.45% for depositors (11.05 - 8.5).

Meanwhile not all banks are ready to hike fixed deposit rates. V Santhanaraman, executive director of Bank of Baroda, says banks cannot hike deposit rates much because that would mean an increase in lending rates as well. "As credit growth has been slow, banks cannot increase loan rates," he said. Santhanaraman informed that his bank will be taking decision next week on interest rates.

On the loan rates front, Suresh Gurumai, director, retail banking at Barclays Bank, said his bank will be taking decision later and expects some adjustment in interest rates. Meanwhile Prakash P Mallya, chairman and managing director of Vijaya Bank, expects no hike in home loan rates.

On the other hand two of the biggest banks - the State Bank of India and ICICI Bank - are, however, are in 'wait and watch' mode.

V Vaidyanathan, executive director of ICICI Bank, the country's largest private sector bank, on Thursday gave a statement in which he said bank would 'await cues from the RBI' next month before taking a decision on interest rates.

A senior State Bank of India official in an interview told DNA earlier this week that it is monitoring the situation. "There has been a hardening in rates but we need to take into account many other factors. We will meet on Saturday to take stock," the official said. SBI's main lending rate currently stands at 12.25%.

The CMD of Dena Bank, PL Gairola, said if inflation continues to remain high then the banks are not left with any choice but to hike deposit rates. But he expects that there will be moderation in prices in the medium term.