The Reserve Bank of India’s mega Rs 1-trillion bond purchase programme in the fiscal first quarter is going to subdue credit growth, with companies rushing to the bond market to source cheaper capital.

There will also be little room for banks to hike interest rates against the backdrop of low credit demand and excess liquidity. Despite deposit and lending rates bottoming out, they could stay where they are for the next couple of quarters.

Union Bank of India managing director and CEO Raj Kiran Rai expects the yields to anchor between 6% and 6.15%. “With the resurgence of Covid-19 caseloads, the uncertainty element has gone up. So the RBI’s focus has been to propel growth with stable interest rates. We expect the bond purchase programme to temper the yields to around 6% to 6.15%. Deposit and lending rates will remain stable as the RBI continues with its accommodative stance and focus on growth,” Rai told Indianbankingnews.com.

To maintain the low rates for lending, banks need to keep the deposit rates low. But if they stay so low and continue to fetch negative returns after taking inflation into account, there is a danger of small savers deserting the banks and moving to riskier assets like gold.

Ahead of the RBI’s first bi-monthly monetary policy for the fiscal, some banks had indicated that the low rates couldn’t continue for long as they feared depositors would desert the banking system for better returns. When State Bank of India (SBI) hiked the minimum interest on its home loans by 25 basis points (bps) to 6.95% effective 1 April, the view that rates would slowly inch up gathered steam. Inflation was also becoming a bit of a bother and consumer surveys conducted by the RBI showed that inflation expectations were at 10%.

SBI managing director Challa Sreenivasulu Setty, however, clarified that the bank was only withdrawing its concessional home loan offer for the month of March. “There will be no change in our lending or deposit rates. On the home loan front, we had a festive offer running up to the end of March. This has run its course and we have gone back to our earlier rates,” he told Indianbankingnews.com.

Canara Bank executive director A Manimekhalai agreed that interest rates would not be hiked at least during the current fiscal’s first quarter. “With the RBI’s prolonged accommodative stance and huge liquidity infusion, there is no room to raise rates. For the first quarter at least, both deposit and lending rates would remain the same,” he told Indianbankingnews.com.

Banks may not be in a position to disturb this equilibrium. “Already banks are depositing the excess liquidity with the RBI. So there is no need to raise interest rates on deposits until such time that the demand for credit rises. Banks will continue to lend at close to repo rate or lower,” said Central Bank of India executive director Rajeev Puri .

Though the deposit rates have bottomed out, there may be some pressure on the margins of banks because you still have to lend at low rates. Sometimes banks hike risk premiums without changing the loan card rates. So will this trend catch on?

“It is unlikely that banks will hike risk premiums,” said Setty. “With the excess liquidity in the system and credit demand being low, companies are borrowing at the repo rate. So we cannot increase the risk premiums.”

With no visible demand for corporate credit, the banks will continue to expand their retail book. But the high cost of servicing the retail loans may limit the public sector banks to significantly scale up their books beyond a point.

Just growing the retail book is hardly the answer, believes Setty. “The cost of servicing these loans is pretty high. Also, not every public sector bank has the system, procedure and risk management mechanism to scale up their retail books beyond a point,” he said.