Latest data from the Reserve Bank of India (RBI) showed banks borrowed ₹73,297 crore from the central banks through different LAF windows in a drastic change from the situation just five months ago in May when as much as ₹3.10 lakh crore was kept with the central bank in excess liquidity.
Rising demand for loans has also made banks borrow from the central bank. Credit growth at close to 18% is almost double the 10% deposit growth. With banks in a rush to raise deposits, lenders believe that there could be a spike in rates – at least in the short term.
“Banks are already offering higher deposit rates but the strong competition for retail deposits means that growth is happening slowly,” said Bhaskar Panda, EVP, HDFC Bank. “System liquidity has tightened pretty substantially in the past few months and it is fair to assume that rates will stay elevated with deposit rates going up.”
Large banks such as the State Bank of India, Punjab National Bank, HDFC Bank and Axis Bank have raised their deposit rates in some tenures by up to about 80 basis points as they go all out to garner more funds to keep pace with strong credit growth.Bankers, however, do not expect the benchmark bond yields to move up sharply.
“The benchmark yield moved up and has now eased. Inflation is still high and global interest rates are only headed higher. But though liquidity is tighter, yields have already moved up and are unlikely to rise sharply,” said the treasury head at a public sector bank.
The yield on the 10-year benchmark government security ended Thursday at 7.41%, down from Tuesday’s close of 7.44% in a Diwali-shortened week of trading. The benchmark yield has come off from a peak of 7.51% earlier this month and a recent high of 7.62% in June.
However, higher global interest rates could also put pressure on the RBI to keep rates elevated. On Thursday, the European Central Bank raised interest rates and announced it was changing the terms of its ultra-cheap loans to commercial banks in a bid to shrink its bloated balance sheet and fight off a historic surge in inflation. The ECB raised its deposit rate by a further 75 basis points to 1.5% – the highest rate since 2009 – in a sharp turnaround from as recently as July, when rates were in a negative territory as they have been for eight years.