Time Ripe For 20 Basis Points Reverse Repo Rate Hike, Says SBI

Citing the massive spike in credit growth during the first half and the steeper fall in deposits and the resultant rise in term money rates, coupled with the record high borrowings, an SBI report has called for a 20 basis points (bps) increase in reverse repo rate outside the MPC ambit so that the central bank find buyers for the flooding new debt papers.

The budget 2023 has pegged the Centre's gross borrowing at a record Rs 14.3 lakh crore and for the FY22 at Rs 10.5 lakh crore, lower than Rs 13.5 lakh crore this fiscal, while together with the states, the gross borrowing will be Rs 23.3 lakh crore and the net will be Rs 17.8 lakh crore. The budget seeks to pay back Rs 3.1 lakh crore next fiscal, up from Rs 2.7 lakh crore this fiscal.

Given this and the rising interest scenario elsewhere and along with the fact the budget did not speak about the government bond inclusion into global bond indices, Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, feels that the RBI cannot but hike the repo rate by 20 bps outside the MPC meeting because rising deposit rates means lending rates will also have to go up else banks will have to cut into their margins.

Given all this, the time is now appropriate to go in for a 20 bps hike in the reverse repo rate, but outside the MPC meeting as enshrined in the RBI Act that clearly lays down that reverse repo is more of liquidity management, he said, adding a reverse repo hike is also required as a larger corridor has resulted in rate volatility. 

While during the first half of FY22 itself, signs of credit recovery became visible, the latest data for the week to January 14, 2022, show all banks incremental credit grew by Rs 5.46 lakh crore more than double of Rs 2.72 lakh crore in the same period last fiscal. As against this, the incremental deposit growth was only Rs 8.6 lakh crore, down from Rs 10.5 lakh crore. 

"However, if we break the total incremental growth so far in FY22, it is clearly evident that there was meagre credit growth in H1, despite huge deposits growth," he said. 

During H1, banks were investing in G-secs and are not under stress due to rising yield. The real problem might have started when credit growth started picking up in H2, but deposit growth lagged behind.

Accordingly, the incremental credit-deposit ratio currently stands at 140 indicating sooner than later there is a need to increase the deposits rate to garner more durable liquidity in terms of bank deposits. A delay in raising deposit rates may result in a large incremental increase at a later point in time. Also, small saving rates continue to be attractive in terms of rates. Therefore, the need to hike the repo rate sooner than later, Ghosh said. 

It can be noted that banks have been offering higher rates to term deposits already going up from 5.10 per cent to 5.40 per cent from SBI to 5.75 per cent from Axis Bank from 5.40 per cent and for HDFC Bank from 5.20 per cent to 5.60 per cent.

While the RBI has cumulatively cut the repo rate by 115 bps to 4 per cent and the reverse repo by 155 bps to 3.35 per cent, since the pandemic, the government has not revised small savings schemes rates.

As against this, banks have reduced their rates on both deposits as well as lending significantly. For all banks, weighted average lending rates on fresh loans declined by 99 bps (132 bps for state-run banks and 67 bps for private banks) and the weighted average term deposit rates came down by 132 bps -- 123 bps for state banks and 136 bps for private banks, during March 2020 to December 2021.

While in FY22, small savings collections exceeded the budgeted amount by a large Rs 2 lakh crore, resulting in net borrowing falling short by Rs 1.7 lakh crore, the challenge lies in FY23 with net borrowings increasing by Rs 4.1 lakh crore and small savings supposed to be lower by Rs 1.7 lakh crore than the revised FY22 amount.

If these numbers fructify in FY23, there will be large pressures on bank deposit rates to go up given that small saving rates are already much higher than bank deposit rates, therefore the need to hike the rates, Ghosh concludes.