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Repo is Back. Will Banks Hike FD rates?

The 3G Auctions and an advance tax date (Jun 15) have produced an interesting twist: Banks are scrambling around for money.

After nearly two years, the RBI Repo Window is showing action – Repo is where banks borrow money from RBI for a very short term, typically, and provide securities as collateral (which they will “repurchase”, thus “repo”). Reverse repo is the other direction – where banks park excess cash with the RBI.

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In the last two days banks have borrowed around 60,000 cr. each day, with nearly no reverse repo, meaning things are tight on the liquidity front. This is supposed to be temporary, which is why the RBI has temporarily opened a second liquidity window for the repo/reverse repo auctions, upto 0.5% of bank deposits. I’m guessing that adds up to about 35,000 cr. which has already been maxed out.

This liquidity adjustment only lasts till July 2. Some of the advance tax outgo may be reversed, but the 3G money will still be a pain point. The call money market will show signs of stress if the liquidity situation gets worse (typical yields are 3.5% to 5% in the Call Money markets, can shoot up if people are desperate for money).

How this is useful for some of us: Banks may offer higher rates for FDs, either very soon or after July 2.

  • rajsmusings says:

    >Could this also mean a hike in interest on home loans?

    Because lot of time banks give the reason of 'high cost of funds' as an excuse for raising the interest on loans. And with a hike in FD rates, hike in loan rates not very far ?

    Can you also consider doing a post on the upcoming base rate funda.

    As a common man I always thought that Banks are really not helping a common man decode their difference/discrepancy in interest rates by pegging it to their own benchmark rates. Always felt it would be much easier to compare if every one quoted their rates relative to a standard rate be it repo/reverse repo anything, but a single rate.

    For example it so tough to compare something like SBI Home Advantage is 2.25% less than SBI SBAR (which is 11.75) Vs Bank of Baroda HL which is say 1.5% less than bank's BPLR(which is 12%). And when you have to compare 10 banks to find the best on offer. It's surely not easy.

    Regards
    Raja

  • Asit Mehta says:

    >Yes interest rates are definitely going to shot up since bank are borrowing money at a higher rate and hence they will surely going to compensate this by increasing their interest rate of various loans.
    May be, inflation will also see a little hike.