Shorn of pricing power, banks to take it on chin

Can lenders go lockstep with the Reserve Bank of India every time there’s a rate hike? Can they hike lending and deposit rates in times of slowdown?

They can’t, at least not this time, said Suresh Ganapathy, head of financial research team at Macquarie Securities.

“Banks have already raised interest rates considerably. They have lost their pricing power. Friday’s hike will not be translated into a lending rate hike, banks will have to absorb its effects,” he said.

Cut to the chase, that would mean margin pressures will rise afresh for the banking industry.

Rajiv Mehta, analyst with IIFL, said banks have not been behind the curve while raising lending rates in the past, but they will have to be more judicious this time round.

“That’s because incessant increase in interest rates only leads to higher non-performing assets, or bad loans,” he said.

And a pause doesn’t seem to be in immediate sight considering the stickiness of inflation and elevated inflationary expectations.

The consensus on the street is there is still time before Mint Road presses the pause button.

Indranil Sen Gupta, chief economist at Bank of America Merrill Lynch, in a note predicts the RBI will go for a pause only after one last hike in the October 25 monetary policy.

“On our part, we can only emphasise that we see a need to cease tightening as soon as inflation peaks off, given rising global and domestic growth risks,” he said.

“We believe inflation will not peak off till October and the October inflation data will not be available till November 14, which is well after the October 25 policy,” Sen Gupta said.

Leif Eskesen, chief economist for India and Asean at HSBC, said the RBI still rightly sees inflation as the dominant concern for India’s domestically oriented economy and maintained the tightening bias, signalling that further hikes are likely.

“But further moves are now more explicitly conditioned on global developments,” he wrote in a note.