Bankers hope for surprise from RBI

Expect rate rise pause, amid market expectations to the contrary.

Bankers are expecting a surprise gift from Reserve Bank of India (RBI) Governor Duvvuri Subbarao, amid the general view in the financial markets that Thursday’s monetary policy will raise key rates by at least 25 basis points.

Bank of Baroda Chairman and Managing Director (CMD) M D Mallya said he was “not expecting any rate hike” in the mid-quarter review as inflation and inflationary expectations had cooled down. “Earlier rate increases have already been transmitted. Liquidity has relatively eased but is still not as comfortable. If liquidity improves, banks may not have to increase rates further,” Mallya said.

His counterparts in some other banks agree. Oriental Bank of Commerce CMD Nagesh Pydah said softening short-term rates (certificates of deposit) suggested that liquidity was coming back gradually. Inflation is also coming down, though there are concerns over crude oil prices. “My view is that RBI may not raise rates, as any further increase may affect economic growth,” Pydah added.

RBI has raised interest rates seven times in the current financial year to control inflation, which has stayed much above its comfort level. In the third quarter review of the monetary policy, RBI had raised its March-end inflation projection to 7 per cent from 5.5 per cent.

Though inflation continues to stay above 8 per cent, lending rates for even top-rated companies are well above 10 per cent, which is having an adverse impact on loan off-take. Bankers said loan growth was moderating, mainly due to higher rates.

“For banks, it will be difficult to raise rates again immediately. March is a busy month for banks as a lot of lending happens in this period. I don’t think banks will be willing to raise rates as it may hurt the demand for loans,” said P Sitaram, chief financial officer, IDBI Bank.

Anil Girotra, executive director of Andhra Bank, said aggressive rate increases might slow credit demand and hit economic growth. “I feel RBI will prefer to wait a little longer for further rate action,” he said.

Analysts and economists said bankers might be indulging in wishful thinking. The bond market, for example, has already factored in a 25-basis point increase in key policy rates.

They said RBI would continue to raise rates to tackle inflation. “RBI may raise both policy rates by 25 basis points to curtail inflation. The February inflation is expected to be around 8 per cent, above RBI’s comfort zone. A month down the line, the liquidity situation should be comfortable,” said A Prasanna, economist, ICICI Securities Primary Dealership.

In a recent research note, Rohini Malkani and Anushka Shah of Citigroup said higher food and oil prices were likely to result in inflation being sticky in the 7-7.5 per cent range with an upward bias throughout 2011. “Given inflation and growth dynamics, we maintain our view of RBI raising rates by an additional 50 bps in 2011 and 50 bps in 2012,” said the report.

India’s inflation indicator, the wholesale price index, was at 8.23 per cent in January, marginally lower than 8.43 per cent in December 2010. Weekly food inflation data showed a decline to 9.52 per cent in the year to February 26 from previous week’s 10.39 per cent. The February inflation data will be released on Monday.