There could be steep rise in the lending rates as banks recover from their borrowers the cost of maintaining interest free deposits with RBI. As per the recent amendment RBI will stop paying interest on all cash reserves (CRR). Till now the bank has to maintain the CRR to level of 3% of bank deposits received interest at the rate of 3.5%.

But now, as per the revised amendment done to the RBI Act states that no interest would be paid on cash balances maintained by banks. Out of every Rs. 100 that the bank collected via deposits, it has to maintain Rs. 5 as cash reserve and Rs. 25 as statutory liquidity reserve. The balance Rs.70 can be used for lending.

As per the new amendment these interest payment stand to be ceased and would lead to loss of six basis points in the interest margin for bank in next financial year, which would be recovered by rising lending rates through their borrowers. It is also backed by the tightening of domestic inflation rates, along with firming up of US interest rate.