Indicative lending rate increase outstrips fixed deposit rate

*The margin between these indicative lending and borrowing rates computed by the Central Bank has grown from 1.07 percent a year earlier to 2.69 percent.


The indicative lending rate of the banking system has outpaced the fixed deposit rate as dealers say interest rates should not spike within the next few months although there is pressure on interest rates as the Central Bank continues to intervene in the foreign exchange market and credit growth remains strong.

Rupee liquidity in the financial market remains tight. Some banks are advertising fixed deposit rates higher than 12 percent in a bid to attract more funding. The average weighted fixed deposit rate (AWFDR) reached 8.95 percent last week, up from 8.50 percent a year earlier. "This does not say much because deposit rates do not increase as fast as lending rates do," a dealer said.

While AWFDR changed by 45 basis points (bps) from last year, the average weighted prime lending rate of the banking system moved up 237 basis points (bps). "This rate applies to high net-worth individuals and institutions so the extent to which interest rates have gone up for the majority of borrowers in this country is much more," a dealer said.

The margin between these indicative lending and borrowing rates computed by the Central Bank has grown from 1.07 percent a year earlier to 2.69 percent.

"Credit growth remains very high and we are also seeing a lower growth in deposits which means people are using their money for whatever reason and demand for more credit," another dealer said. "This and Central Bank intervention in the foreign exchange market is draining rupee liquidity and putting pressure on rates."

Overnight money market interest rates have been inching upwards for weeks, however, last week rates eased somewhat with the Central Bank entering into dollar/rupee swaps with some banks which were putting liquidity into the system. The Central Bank did not carry out any cash auctions to pump in liquidity from Tuesday through Thursday, Monday being a holiday.

However, by Friday, the Central Bank had to pump in Rs. 5 billion to ease liquidity tightening.

Call money interest rates for overnight interbank borrowing without collateral inched up to 8.86 percent from 8.83 percent the previous day, but was lower than 9.04 a week earlier, the easing being on account of the currency swaps. Money market repo rates for overnight interbank borrowings against collateral, Treasury securities, inched up to 8 percent from 7.98 percent, a week earlier it was 8.20 percent. The Sri Lanka Inter Bank Offered Rate was flat at 8.97 percent.

The Central Bank has sold US$ 1.1 billion to keep the exchange rate stable during the three month period July through September. According to dealers, the a further US$ 985 million has been sold since the November 22 depreciation of the rupee.

"As long as credit growth remains high and the Central Bank intervenes in the foreign exchange market, interest rates would come under pressure. What needs to be seen now is for how long the Central Bank can sustain this intervention, both in selling dollars to keep the exchange rate steady and pumping in rupees to keep interest rates steady," a dealer said.

If inflation remains subdues, dealers believe policy interest rates may not have to be increased because the Central Bank could resort to tightening the Statutory Reserve Ratio (SRR) of commercial banks, which would increase interest rates and squeeze of credit demand.

"For now, we do not see any spike in interest rates for the short term, but the pressure continues. If the foreign currency inflows expected by the Central Bank materialise then we could see these pressures ease," a dealer said.

Despite the Central Bank forecasting slower credit growth towards the end of 2011, it hardly happened.

Private sector loans from the domestic banking sector grew 35.3 percent year-on-year to Rs. 1.764.6 billion as at end November 2011, generating new loans amounting Rs. 60.4 billion, the highest generated in a month last year, latest data published by the Central Bank showed.

New loans from the domestic banking system to the private sector amounted to Rs. 56.4 billion in October 2011. In September it amounted to Rs. 53.8 billion, in August Rs. 49.4 billion and Rs. 27.3 billion in July. New loans generated for the first eleven months of this year amounted to Rs. 436.6 billion. The new loans generated for 2010 was Rs. 290 billion.

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