Mumbai :Banks are set to raise deposit rates and lending rates as the growth in currency in circulation and the recapitalisation plan will lead to leakage of deposits from banks. “Given that many state elections are scheduled for 2018, growth in currency in circulation is likely to remain robust. This in turn would put pressure on bank deposits to expand as it represents a leakage from the banking system. Furthermore, the bank recapitalisation plan through recap bonds will also lead to leakage of deposits from banks,” State Bank of India (SBI) has said in report.
“In order to plug this leakage banks may have no other option but to increase the deposit rates, that in turn may put pressure on MCLR (marginal cost based lending rate). This trend may pick up pace with more banks joining the bandwagon,” SBI report ‘Ecowrap’ has said. In fact, on March 1, a day after hiking deposit rates by up to 75 basis points, SBI increased the one-year MCLR by 20 basis points (bps) to 8.15 per cent from 7.95 per cent. ICICI Bank, India’s largest private bank, increased the one-year MCLR from 8.2 per cent to 8.3 per cent and overnight MCLR rate from 7.8 per cent to 7.95 per cent. New loans will now become expensive as they are linked to one-year MCLR. PNB also hiked the MCLR rate.
The situation of rising yield has also been aggravated with the bond yields going through the roof. Bond yield in India have jumped by close to three times than what it rose in the US (for the 8 month period ended March) implying that the increase in bond yields in India is also because of other factors apart from tightening of global yields. “One such factor could be the asymmetric liquidity management by the RBI. Alternatively, it is withdrawal of permanent liquidity through OMO but injection of temporary liquidity through repo,” it said.
Interestingly, excess SLR of ASCB which increased to double digits for a few months after demonetisation has declined steadily and has reached around 9 per cent in the recent month. From a high of excess SLR worth Rs 12.73 lakh crore for the fortnight ended January 6, 2017 the excess SLR has now been reduced by Rs 1.84 lakh crore to Rs 10.89 lakh crore for the fortnight ended February 16, 2018. In the last three months the excess SLR holdings of banks have been reduced by only Rs 21,389 crore. Thus offloading of government securities by banks is not the primary reason for bond yields rising as this number has not been significant, the SBI report said.
After the initial spike in deposits due to demonetisation, deposits growth has started moderating from April 2017. From a peak of 15.6 per cent y-o-y growth in fortnight ended November 25, 2017, the growth came down to 10.9 per cent in April 2017. This has further reduced to 5.9 per cent for fortnight ended February 16, 2018, SBI report said.
Meanwhile, the currency in circulation has increased rapidly in the past two months. On a monthly basis, growth has been 0.45 lakh crore and 0.51 lakh crore in January 2018 and February 2018 respectively, compared to an average of 0.1 lakh crore and 0.2 lakh crore respectively in these two months in previous years (except 2017).