Interest rates may rise by 25-50 basis points: SBI

Liquidity pressures to top agenda of RBI’s meeting with bankers.

With inflation remaining at elevated levels, banks are bracing for an up to 50-basis-point increase in key policy rates.

State Bank of India (SBI) Chairman O P Bhatt said the Reserve Bank of India (RBI) might raise interest rates by 25 basis points soon. Banks are waiting for the monetary policy review on January 25 for further indication.

Seconding the SBI chairman’s outlook, Crisil Chief Executive and Managing Director Roopa Kudva said there was a general expectation that the rates would be raised considering the current rate of inflation.

RBI was likely to raise the repo and reverse repo rates by 50 basis points in the next six to nine months, she added.

RBI has been in the rate hardening mode since the fourth quarter of 2009-10. So far in the current financial year, the central bank has increased policy rates by 125-175 basis points to check inflationary pressures.

RBI has said policy transmission improves if liquidity in the banking system is in the deficit mode. Tight liquidity has prompted several banks to raise deposit rates many times. They have also increased lending rates, but at a slower pace.

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

Banks also face uphill task in raising deposits at higher rates, which may dent interest margins.

Meanwhile, Senior Indian Bank’s Association official said concerns over finding adequate resources to fund credit would top the agenda at the pre-policy review (Q3) meeting when bankers meet RBI tomorrow.

Though liquidity pressure has eased marginally, the system remains in resource deficit mode. Banks have raised interest rates on deposits by 100-150 basis points, but it takes 30-60 days to check customer response.

The pace of deposit growth was expected to gather pace in the current quarter, said top executive of a public sector bank.

The difference between the pace of credit growth and deposit mobilisation had been wide till mid-December 2010. Between April and mid-December 2010, the credit rose 12.4 per cent, while deposit growth lagged at 6.8 per cent.

The situation was quite different in 2009-10. Deposit growth between April and mid-December 2009 was 9.8 per cent, as against 5.7 per cent rise in credit, according to the RBI data.

Bank executives would also appraise the central bank on non-performing assets (NPAs) and provisions made for them, an IBA official said.

Most banks have already met RBI’s norm to set aside funds to cover 70 per cent of NPAs. However, large banks like SBI and ICICI Bank have got an extension to meet the 70 per cent norm.