MONETARY POLICY

GUEST COLUMN: Flush with cash, banks hike rates on bulk deposits

banks-pti Debt heavy corporates and highly leveraged borrowers need to be vigilant | PTI

In the last monitory policy meeting, Reserve Bank of India (RBI) kept rates unchanged at 6 per cent, a 7-year low. RBI also assured markets that an easy liquidity policy is here to stay. RBI lowering inflation projections for the second half of 2019, gave enough assurance to dilute the mild hawkishness. Given domestic liquidity scenario, interest rates need to stay subdued. However, recent developments points out something different. Some PSU banks have raised interest rates by 50-150 basis points on bulk deposits exceeding Rs 1 crore. Some private banks hiked marginal funding rate by 10-30 basis points which indicates that borrowing cost may start increasing. If the increase in deposit rate percolates small savings and short term time deposits as well, it may eventually lead to higher borrowing costs. Some private banks already raise lending rates by 20-40 basis points. All eyes are on the US Federal Reserve meeting on March 13. Bankers are anxiously watching global bonds rot and headline inflation numbers. Latest corporate result from SBI has made a larger provision of around Rs 3,400 crore for investment portfolio.

Rising bond yield and rate hikes on bulk deposits may be a harbinger of a liquidity dearth.

Liquidity is abundant and banks are flush with funds, capital infusion in mutual funds is at a staggering high and markets are flooded with cash. So why banks are ready to pay higher rates for bulk fixed deposits? Why RBI assures market that liquidity tap is available? It is probably because banks might have sensed a paradigm shift in global monitory policy. As inflation is showing an uptick in many developed markets, quantitative easing may turn into quantitative tightening in the longer run. If it happens so, it may temporary unwind the carry trades – borrowing low interest rates currency and lending in high interest rates yielding currency arbitrage – which could prompt a unidirectional buying in US dollars and euro, resulting in a sell-off in emerging markets. A miniature version of the credit freeze in 2008 may repeat. RBI is inclined to keep rates stable, and if the scenario permits there could be a minor rate cut so as to slash borrowing costs and reduce banks burden, however global monitory policy may point towards the opposite direction.

All eyes on the Fed and the US consumer inflation

Market pundits are keenly awaiting next week's consumer inflation data of US and next month's Federal Open Market Committee of the Fed. A rate hike is almost priced in. If the consumer and wage inflation increases in the US and EU, Fed may opt for little higher hikes which may strengthen the US dollar and lead to higher borrowing cost. Emerging markets may be compelled to follow the Fed. In such a scenario, it may cause worry for those companies having high external borrowing and a debt heavy balance sheet. Rising lending cost also add woes of subprime borrowers, cash strapped MSME sector and also put a pressure on the highly leveraged borrowers who are having multiple debts like home loan, educational loan, auto loan and credit card loan. Headline inflation needs a close and constant watch.

US Fed fund rates may rise throughout 2018. EU rates may double, sooner than expected

Indian interest rates peaked around 18 per cent in 1997 during the Asian currency crisis and currently, stays at 6 per cent, a 7-year low. The US interests peaked around 19 per cent in 1982 and is now hovering around 1.5 per cent. Market expects 3 hikes in 2018 taking the Fed fund rate to 2.25 per cent in 2018. Britain is likely to hike 25 bps soon and may raise rates up to 75 bps. Some market pundits however, forecasts a much faster increase. Bond king Jeff Gundalch and Bill Gross, an astute forecaster Martin Armstrong says rates may be hiked faster. Martin Armstrong says European interest rates may double from here, as ECB is not able to buy debts any more. They have to rely on private buyers. German bond yields are showing this nervousness. The yield of a German 10 year bond has increased nearly 70 per cent in the last few months. Indian bond yield also firmed up from 6.48 per cent to 7.55 per cent.

Interest rates upturn – A wake up call for debt heavy corporates and leveraged borrowers

RBI kept rates unchanged and played a bold gamble. RBI choose to deviate from global rate path and also ignored rapid tightening of the US Fed fund rates. Many market pundits believe that the Fed rate hike may stay gradual. If equity markets remain subdued and crude oil fall below $50, inflation may cool down and bond markets may be stabilised.

Indian economy is just stabilising from the twin shocks of GST and demonetisation. Pricing power is improving. India continues to show high salary increments compared to other countries in the Asia Pacific region. However, given the decreasing pattern in the year-on-year salary growth, Indian employees could see a single digit salary increase in 2018 for the first time since 2011. Relative stagnancy in wages, rise in household budget, steep increse in retail fuel cost are some macro headwinds. An Indian middle-class borrower cannot afford rate hikes in the near term.

(The author is CEO of Paradigm Commodity Advisors)

Disclaimer: The views expressed in this article are solely those of the author and do not necessarily represent the views of the publication.

This browser settings will not support to add bookmarks programmatically. Please press Ctrl+D or change settings to bookmark this page.

Related Reading