SBI expects moderate monetary tightening in RBI`s review

State Bank of India Chairman O P Bhatt today said he expected moderate monetary tightening in Reserve Bank of India’s quarterly review due Tuesday.

He indicated that the central bank could raise the cash reserve ratio (CRR), or the proportion of deposits that banks kept with RBI, by 25 basis points but that might not prompt the country’s largest bank to raise interest rates.

“It is very difficult to second guess the governor, especially two days before the policy. When oil prices were at their peak, it was safe to assume further tightening… A final decision will be taken by the asset-liability committee after the RBI’s announcement,” he told reporters on the sidelines of a function.

Since April, the RBI has increased the CRR by 125 basis points to 8.75 per cent, while the repo rate has been increased by 75 basis points to 8.50 per cent.

Bhatt, however, said that the liquidity situation for SBI was comfortable, though there was some slowdown in demand for loans from the manufacturing sector, especially small and medium enterprises, for commercial real estate and auto loans.

Asked about the merger of associate State Bank of Saurashtra with SBI, Bhatt said the process would be completed by the end of 2008. The Union cabinet had approved the merger on Thursday but the SBI chief said he was yet to receive an official communication.

SBI planned to use this as a test case for the merger of other six associate banks.

“The merger will be a learning experience. If successful, it will help us understand the issues, decide the pace and the structure that should be followed. Else, we will have to think of some other route,” Bhatt said.

In addition, he said that the proposed amendments to the SBI Act would help the government reduce its shareholding from 59.73 per cent to 51 per cent and help generate funds for the bank to finance its expansion plans.

At present, the law barred the government from diluting its stake in the bank below 55 per cent.