Banks are raising interest rates, pre-empting RBI

Vastavam web: India’s struggling economy is facing a new challenge: banks are raising interest rates even though the central bank is leaving its rates unchanged, as risks such as surging bond yields and more provisioning requirements erode their profit.HDFC Bank, India’s second-biggest bank by assets, on Wednesday became the latest to raise some rates by 10 basis points. The same day, the Reserve Bank of India (RBI) kept its policy rate unchanged, to “carefully” nurture economic growth.

An RBI staff study showed every 100 bps increase in borrowing costs lowers the investment rate by as much as 91 bps.“Lending rates will move up. We cannot avoid that from happening,” the chief of a large state-run bank told Reuters.Banks are facing a number of threats. Chief among them is that rising inflation has hurt bonds, driving benchmark 10-year yields up more than 100 bps since July, a big concern for banks, which are the biggest buyers of the debt.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.“Lending rates might go up with such a large increase in bond yields,” said Soumya Kanti Ghosh, chief economist at State Bank of India.