RBI’s repo rate hike doesn’t seem to panic banks: stable lending rates expected
By Neelima Shankar
Mar 23, 2010
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Despite the sudden shock provided by the RBI in the form of rising repo rate, the banks foresee stable lending rates in the near term. They however, do not deny the fact that the act by RBI may lead to raise in short term lending rates.

Analysts further said that the step taken by the RBI would further force banks to remove special loan rate schemes and further hike in deposit rate.

The sudden hike in repo rate by the RBI by 25 basis points has been a step to curb the rising inflation rate in the country. Repo rate refers to the rate at which the RBI lends short term money to banks and reverse repo rate refers to the rate at which banks deposit their surplus funds with RBI. The repo rate was increased to 5% from 4.75% and the reverse repo rate, to 3.50% from 3.25% with immediate effect.

"We are not likely to see immediate hike in lending rates. There is enough liquidity in the market till now," said B.A. Prabhakar, executive director at state-run Bank of India.

"May be some short term corporate products may be expensive but it will not affect regular working capital loans," said J.P. Dua, chairman and managing director at Allahabad Bank.

Bankers say that the change in repo and reverse repo rate would not bring substantial effect on bond yields and profitability.

"It depends from bank-to-bank but I don't think it will impact profitability much," said Bank of Baroda's executive director R Bakshi.

"I don't also see any impact on the profitability with just a 25 basis point hike in repo rate," Bank of India's Prabhakar said.

However, if inflation rises further, banks would have to raise deposit rates leading to overall rise in rates, he said.

Analysts have reported that many banks have withdrawn special loan schemes and such steps are more to follow in the near future.

"The move by RBI should be taken as an indicator of underlying credit demand going forward," Amit N Rane, analyst at Angel Broking, said.

"In short term it will be negative for the stocks as cost of funds would go up but banks would be able to pass it on to the customers. In the long term we remain positive to the sector," he said.


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