Interest rates set for yet another rise

29 Jan, 2007: Interest rates are likely to go further up as the central bank might resort to increase the rates at which it lends short-term funds to banks in the third quarter review of annual statement on monetary policy for 2006-07 on Wednesday.

As inflation continues to be the prime concern of the government, the Reserve Bank of India, a chairman of a public bank said, would also like to slow down the growth in the consumer loan but would maintain the fund flow to the firms involved in expansion of their existing facilities.

He said the challenge before RBI is to contain the inflation without affecting the economic growth.

Bankers feel that RBI will raise the short term interest rates, which is also known as reverse repo rate by half a percentage points to 6.5%, which would immediately lead to firming up of variable interest rates in the market.

As majority of loans in the real estate sector is given at variable rate, any hike in the reverse repo rate would lead to increase in the home loan rate.

Also, a senior banker said the impact of hike in short-term rate would not be very harsh on term loans taken by corporate.

The increase in the interest rate on long-term loan would not be directly proportionate to increase in the short-term fund, he said.

RBI is also not happy with the unbridled growth at around 40% to Rs 90,000 crore in 2006-07 in the home loans. The regulator in a statement argued that this has made the real estate a costly asset class.

The central bank in its annual credit policy had increased the provisioning requirement on advances in sectors like personal loans, residential housing loans beyond Rs 20 lakh and loan for commercial real estate from 0.40% 1.0%.

Because of these measures, the cost of funds for banks to lend to these sectors went up. This resulted into increase in the interest rates.

Source said as the growth in the consumer and home loans continued despite these measures, RBI might decide to announce more measures to contain the credit growth.

In the last one year up to January 5, 2007, growth in the credit to companies and consumer loan is 31.09% which is much more than the growth in the deposits in the banking sector at 22.5%.

This, a senior banking official said, has affected the liquidity condition in the banking sector which has resulted into firming up of the overnight inter-bank borrowing rates to around 8% against the RBI's overnight lending rate of 7.25%. RBI is the net lender of over Rs 10,000 crore in the call market.

The banker said the money market is facing liquidity tightness. But as inflation continues to be over 5.5%, which is more than the upper range of the priojected 5-5.5% for 2006-07 by RBI, fresh liquidity infusion through cut in CRR and SLR is out of question.

Therefore, RBI might not announce any measures like cut in the statutory requirements for banks to invest a minimum of 25% of their total deposits, despite the fact that government had recently brought an ordinance that empowers RBI to do so. The ordinance has already been assented by the president.

A senior banker said that RBI would wait to see the impact of the fiscal measures recently taken by the government of cutting the custom duty on imports of various items like cement, steel, copper, edible oil and maize.

He said that the central bank might take such measures of reducing the statutory requirements of investment in March when the market might face tight liquidity situation.

One percentage point cut in the stautory requirements would release around Rs 25,000 crore in the system.

Bankers feel that RBI might not touch the bank rate and CRR requirements at this point of time. The bank rate has already lost its relevance as RBI does not lend long term fund to banks any more. At the same, any increase in the cash reserve requirements would affect the credit flow to the productive sector.

Source: The Timesofindia