Banks expect up to 50 bps rise in policy rates

With inflation still at elevated levels, banks and key decision makers are bracing for an increase of up to 50 basis points (bps) in key policy rates.

State Bank of India (SBI) Chairman O P Bhatt today said the Reserve Bank of India (RBI) might raise interest rates by 25 bps in its monetary policy review next week.

He said market sentiment was such that the market could absorb a 25-50 bps rise in policy rates. However, he felt there was no need for undue concern as inflation was expected to come down to seven per cent by March.

At eight per cent now, SBI has raised its base rate twice. The state-owned lender also increased deposit rates thrice during the period. The bank’s officials signaled the credit growth might moderate if lending rates continued to rise.

Uday Kotak, executive vice chairman and managing director of Kotak Mahindra Bank, today said he expected a rise of at least 25 basis points in key policy rates.

“Interest rates are on their way up. While depositors would have a reason to cheer, borrowers would be concerned. An increase of at least 25 bps is expected this month, while there is speculation of even a 50 basis point rise. I feel, interest rates would go up by around 100 bps in calendar year 2011,”, he said.

Crisil Chief Executive and Managing Director Roopa Kudva said considering the current rate of inflation, there was a general expectation that rates would be raised. RBI was likely to raise the repo and reverse repo rates by 50 bps in the next six to nine months, she added.

Banks also face an uphill task of raising deposits at higher rates, which might dent interest margins.