Banks hope for status quo in mid-term policy review

‘With US further easing policy, a rate rise will push the rupee higher’

With real credit pick-up yet to take place, bankers expect the Reserve Bank of India (RBI) to maintain status quo, as hardening of interest rates may hamper loan demand.

Interest rates have hardened in the recent past, with most banks raising their base rates in October following an increase in deposit rates.

“We hope RBI to maintain status quo on rates, as it can hurt loan demand during the festive season,” said S Sridhar, chairman and managing director, Central Bank of India. Similarly, IDBI Bank Chairman and Managing Director R M Malla expects the central bank to maintain rates at the current level, as the effect of previous rises will be seen in the coming months.

Most banks have reduced their credit growth projection for the current financial year and consider RBI’s 20 per cent loan growth target as unachievable.

“The sector may end up with 17-18 per cent credit growth. To achieve 20 per cent growth, substantial credit pick-up needs to take place in the second half,” M D Mallya, chairman and managing director, Bank of Baroda.

Though loan growth (on a year-on-year basis) has been in line with RBI’s projected trajectory of 20 per cent, deposit growth has been far below the central bank’s expectation of 18 per cent. RBI has prodded banks to beef up deposit mobilisation, hence, lenders increased deposit rates.

Some bankers point that with quantitative easing talks doing the rounds, a rate rise will push the rupee further. Since the start of September, the rupee has risen nearly six per cent on the back of $11.7-billion foreign fund inflows in stocks, attracted in part by the Coal India’s record Rs 15,000-crore initial public offer.

“There is a 50:50 chance of a 25-basis-point rise in policy rates, but if one has to take a call, I will say there will be no change. There have been several policy rate increases in the past. While inflation continues to be high, capital goods formation is on the lower side and there could be challenges for growth going ahead. Internationally, there is talk of quantitative easing and a further decline in interest rates, so a policy rate hike in India will put further pressure on the rupee,” said Ashish Parthsarthy, deputy treasurer, HDFC Bank.

Bankers said the stubbornly-high headline inflation had been a major factor for making case for a rate rise. “Inflation is still a matter of concern. ,So RBI may give a signal by increasing anchor rates,” said Mallya of Bank of Baroda.

M V Nair of Union Bank of India also believes inflation concerns may result in a 25-basis-point increase in key policy rates.

RBI Deputy Governor Subir Gokarn said on Tuesday surging food prices were structural and would put upward pressure on inflation and interest rates.