SBI Research Says Policy Rate Hike Will Ultimately Leave a Good Impact on Banking

The decision to hike policy rate will be ultimately good for the banking sector as the risk is getting re-priced properly, SBI's Economic Research Department said in a report.

"The situation is different than during the global financial crisis wherein the lending started increasing aggressively much before the rate hike cycle began (March 2010 till October 2011)," said Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India.

Currently, the rate hike cycle has begun and now bank lending will increase factoring in the risk.

In an off-cycle meeting, the Reserve Bank of India on Wednesday hiked the repo rate by 40 basis points (bps) to 4.40 per cent with immediate effect. It also hiked the cash reserve ratio (CRR) by 50 basis points to 4.5 per cent.

On CRR, the report said: "High government borrowing has ruled out the possibility of OMO sale, thus CRR increase seemed as the possible non-disruptive option of absorbing the durable liquidity."

The bank believes this will open up space for RBI to conduct liquidity management in future through OMO purchases to address duration supply while absorbing some part of the durable liquidity.