Can absorb only 25-bps repo hike, bankers tell RBI

Cautioning against the adverse impact of a steep rise in policy rates, top bankers on Tuesday told the Reserve Bank of India (RBI) the system would currently be able to absorb a rise of only 25 basis points in the repo rate (the rate at which banks borrow money from RBI).

The effects of high inflation and monetary tightening, growth in deposits and the credit off-take in the new financial year topped the pre-monetary policy discussions of bankers and RBI officials. RBI will announce its annual monetary policy for 2011-12 on May 3.

RBI officials, led by Governor D Subbarao, shared the central bank’s assessment of the economy, including global developments. RBI sought views from the bank chiefs on economic growth prospects, inflation and money supply, among other issues.

Referring to the effects of a rise in policy rates, bankers said a small increase in repo (25 basis points) is what the system can absorb. A rise of 50-75 basis points in a quarter would hamper growth prospects, they said. Among those who attended the meeting were Indian Banks’ Association Chairman and Bank of Baroda Chairman and Managing Director (CMD) M D Mallya, Canara Bank CMD S Raman and Punjab National Bank CMD K R Kamath.

“Inflation is above RBI’s comfort level. A rise in crude oil prices is a concern for RBI. The last hike by RBI has not been passed and deposit rates have more or less peaked,” said S Raman. Going forward, deposit rates are likely to soften, said a senior official of the Indian Banks’ Association.

RBI had raised its short-term policy rates — repo and reverse repo — eight times since March, 2010. It had also raised its inflation projection to 8 per cent for March-end, against the earlier estimate of 7 per cent.

While food inflation stood at 9.5 per cent in the week ended March 19, against 20.18 per cent in the corresponding period last year, headline inflation remained above 8 per cent since February, 2010. Benchmark WPI inflation stood at 8.31per cent in February.

Bankers said lending to the infrastructure sector was also discussed in the meeting. They said interest rates would remain stable in the near term and that asset quality had improved over the past one year.

Apart from issues like inflation and growth, the Deepak Mohanty report on LAF was also discussed with bankers and market participants. “The feedback has been sent, but the roadmap for implementing the recommendations of the report has to be decided. So, RBI sought comments from market players on the report in the meeting on Tuesday,” said an official who attended the meeting.