Rate hike will definitely slow down credit demand: Bankers

The market reaction to RBI’s announcement of a 50-bps repo and reverse repo rate hike came in sharp. Earlier expectations were that the central bank would go for only a 25-bps hike.

Expectedly, industry expressed its disappointment over the sharp increase in interest rates, saying the move would harm the investment sentiment. The stock market also reacted sharply, plunging by over 300 points within minutes of the RBI’s policy announcement.

Bank Nifty, which was trading at 11,395 just before the governor delivered his speech, dived to 11,071 within 15 minutes of the announcement. All banking stocks are trading in the negative zone after the RBI move.

Private sector Yes Bank became the first lender to raise its base rate by 50 basis points today, within an hour of the Reserve Bank’s decision to hike key short-term interest rates.

The Mumbai-headquartered bank hiked its base rate, or the minimum rate of lending, by 50 basis points to 10.25 percent with immediate effect, it said in a statement. The bank has also hiked the rate on loans taken under the older BPLR system or the Benchmark Prime Lending Rate - the rate charged by commercial banks to their most credit worthy customers- by 50 basis points.

“The increase in base rate will enable the bank to fully absorb the increased costs on account of rising interest rates,” it added.

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“The hike is more than expected and it will push interest rates (lending and deposits) up by upto 50 basis points,” Oriental Bank of Commerce Executive Director SC Sinha said.

RBI’s action is in a direction which creates persistent pressure on credit demand. ALCO (Asset Liability Committee) needs to review on the transmission mechanism and timing, said Bank of Baroda Executive Director K Bakshi.

The rate hike by the RBI will definitely slowdown credit demand, Bakshi added.

According to Indian Overseas Bank Executive Director A K Bansal, sooner than later, both lending and deposit rates will go up. Banks would take a call on interest rates in their respective ALCO in the next few days, Bansal said.

Subsequently, the interest rate under the Marginal Standing Facility, an additional borrowing window, has gone up to 9 per cent from the earlier level of 8.5 percent.

[caption id=“attachment_48382” align=“alignleft” width=“380” caption=“Bank of India is the major loser among banking stocks with a fall of over 4 percent. AFP”] [/caption]

Bank of India is the major loser among banking stocks with a fall of over 4 percent. The stock was trading at Rs 386.60 at 1145 IST. Kotak Bank was trading 3.5 percent lower at Rs 469 while ICICI Bank was down 2.81 percent at Rs 1,044. HDFC Bank slipped 1.21 percent while the State Bank of India tripped 2.34 percent and was trading at Rs 2,453.

Non-Banking Financial Institutions (NBFIs) too got the jitters of the RBI policy action which has led to stocks like IDFC falling 4.7 percent at Rs 136.75. HDFC was down by 2.37 percent at Rs 691 and Shriram Transport fell by over 4 percent to Rs 671.

Moreover, all loans, including auto, home, personal and other corporate borrowings, are expected to cost more following the RBI’s decision.

Following are highlights from the monetary policy statement:

Policy measures:

• RBI raises repo rate by 50 bps to 8 percent

• Reverse repo rate rises to 7 percent

• Cash reserve ratio retained at 6 percent

Projections

• WPI inflation forecast revised upwards to 7 percent for March 2012 from 6 percent earlier

• Retains baseline projection for GDP growth at 8 percent in FY12

• Revises FY12 money supply growth projection downwards to 15.5 percent from 16 percent earlier

•Revises FY12 credit growth projection downwards to 18 percent from 19 percent earlier

Policy Stance

•Need to persevere with anti-inflationary stance considering growth, inflation scenario

• Policy stance to manage risk of growth falling significantly below trend

• Policy stance to manage liquidity to ensure monetary transmission remains effective

• Change in policy stance to be driven by signs of sustainable downturn in inflation

• Policy action to maintain credibility of commitment to control inflation

• Stronger policy actions required in absence of complimentary demand, supply side responses

Inflation and Growth

• Inflation continues to be dominant macroeconomic concern

• Both level and persistence of WPI inflation are cause for concern

• Recent headline inflation figures likely to be revised upwards

• Increase in domestic fuel, minimum support prices for certain food items to keep inflation under pressure

• Demand side inflationary pressures have remained strong

• No evidence yet of sharp or broad-based slowdown in growth

• Signs of growth beginning to moderate in some interest rate sensitive sectors

• Extent of moderation in growth to be limited by overall buoyancy in consumption

• Inflation is expected to remain elevated for few more months before moderating towards later part of year

• Monetary policy will contain perceptions of inflation in 4-4.5 percent with focus on non-food manufacturing

The complete RBI Credit Policy