RBI mum, bank rates may go up

New Delhi/ Mumbai, Feb. 8: India’s struggling economy is facing a new challenge: banks are raising interest rates even though RBI is leaving its rates unchanged, as risks such as surging bond yields and more provisioning requirements erode their profit.

HDFC Bank, India’s secondbiggest bank by assets, on Wednesday became the latest to raise some rates by 10 basis points. The same day, the RBI kept its policy rate unchanged, to “carefully” nurture economic growth.

Other major banks are likely to follow suit, raising concerns of de facto rate increases in an economy that is growing at its slowest pace in three years and needs private investment.

An RBI staff study showed every one per cent increase in borrowing costs lowers the investment rate by as much as 0.91 per cent.

“Lending rates will move up. We cannot avoid that from happening,” the chief of a large state- run bank said.

Banks are facing a number of threats. Chief among them is that rising inflation has hurt bonds, driving benchmark 10year yields up more than one per cent since July, a big concern for banks, which are the biggest buyers of the debt.

Banks are also facing a higher cost of funds, a key expense for the lenders, and more stringent regulatory requirements for their liquidity coverage ratios, according to Ashish Parthasarthy, treasurer at HDFC Bank.

Banks are also being forced to raise deposit rates so they can attract more funds, and they continue to set aside more capital as they clear a near- record $ 147 billion in soured debt.

Economists see little relief in sight, but are calling on the RBI to step in to support debt markets, including through debt purchases, thus easing at least one of the major challenges banks face. In a measure of how much margins are being hit, the spread between the 10- year bond yield and a key lending rate, the median one- year marginal cost- based lending rate, has narrowed to only 0.8 per cent from 2 per cent in July.