Lending rates may not rise immediately: Bankers.
The Reserve Bank of India has raised its key overnight rates by 0.25 percentage points to contain inflation, and as strong underlying growth increases demand for credit. It has also extended a facility to raise funds in the banking system.
RBI on Friday raised the repo rate to 5.5 per cent and reverse repo rate to 4 per cent with immediate effect. It had last raised the rates by a quarter percentage point each on March 19 and April 20, lifting the repo rate to 5.25 per cent and reverse repo rate to 3.75 per cent.
Inflation is getting generalised and demand-side pressures are evident, the central bank said. The non-food inflation and fuel price inflation are accelerating and the impact of increase in fuel prices will add up to 100 basis points to inflation immediately, with more effects in the coming months, it added.
“The monetary measures should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process,” RBI said in a statement. It added that it has taken the measures as a part of the calibrated exit from the expansionary monetary policy. RBI plans to review growth projections in its quarterly monetary policy on July 27.
Inflation rate rose to 10.16 per cent for May, compared with 1.38 per cent in the corresponding period last year, due to a rise in the price of fuel and primary articles. In April, inflation was estimated at 9.59 per cent. Repo rate is the rate at which banks typically borrow from RBI for a day.
The strong underlying growth momentum is also evident by the sharp upturn in the capital goods sector, acceleration in credit growth and the widening current account deficit, it said. The monsoon situation so far has been better than last year, holding prospects for good agricultural growth, RBI said.
The RBI rate hike would contain inflation and anchor inflationary expectations without hurting economic recovery, said Finance Minister Pranab Mukherjee late on Friday. “These measures are desirable given that core inflation has risen and credit situation is tight,” Mukherjee said.
Bankers said they did not expect lending rates to rise immediately, though there may be an upward bias. Most banks had announced their base rates earlier this week under a new loan pricing system. The base rates of State Bank of India (SBI) and ICICI Bank is 7.5 per cent, while for HDFC Bank it is 7.25 per cent.
SBI Chairman O P Bhatt said increase in policy rates by RBI would not affect interest rates immediately though there was an upward bias. The increase would not have any impact on the base rate, he said. SBI would take a decision on tinkering with interest rates only after July 27.
“My sense is, for quite some time interest rates will have an upward bias, simply because liquidity has been tightened gradually and at the moment it is tight… though I think it is temporary. By the end of July, there should be Rs 60,000-70,000 crore coming in through redemption, interest payments,” said Bhatt.
“RBI’s action is consistent with its gradual normalisation of policy rates towards a level consistent with the economic growth in a non-disruptive manner,” said Chanda Kochhar, managing director and chief executive of ICICI Bank Ltd.
“RBI’s focus is on taming inflation,” said Alok Misra, chairman of Bank of India.
As part of its announcements, RBI extended up to July 16 a measure to ensure banks could hold 0.5 per cent less bonds required as statutory liquidity ratio (SLR), and ensure adequate liquidity in the system. This facility was to end today. Banks have to keep 25 per cent of their deposits in government bonds as SLR.
“Easing liquidity and raising rates at the same time may seem apparently inconsistent. It should be noted in this context that the liquidity easing measures have become necessary to manage what is essentially a temporary and unanticipated development,” RBI said.
The banking system was short of funds as winners of telecom licences and companies paying advance income tax had borrowed large amounts of money, pushing up short-term rates.
Housing Development Finance Corporation, the biggest mortgage lender, aimed to hold its rates if increase in government spending brought liquidity back in the system, said Keki Mistry, its vice chairman and chief executive officer.
“Nearly Rs 100,000 crore has been weeded out of the system through 3G, BWA auctions and that money has gone to the government. Of course, it will in turn spend that money,” said Mistry. Bank of Baroda also doesn’t plan to raise its rates immediately.
“I don’t think banks will increase lending rates, unless demand picks up sharply,” said M D Mallya, chairman and managing director of Bank of Baroda. On whether deposit rates would be re-priced upwards, Mallya said: “That would be a possibility.”
RBI move was expected but not the timing, said M V Nair, chairman of Union Bank of India. “Its action is to contain inflation as growth consolidates.”
The year-on-year headline non-food manufacturing products inflation rose to 6.6 per cent in May 2010 from 5.4 per cent in March 2010 and -0.4 per cent in November 2009, RBI said. Year-on-year fuel price inflation also surged to 12.7 per cent in March 2010 from -0.8 per cent in November 2009 and further to 13.1 per cent in May 2010, it said.
“At this point it is difficult to say whether there will be another round of rate hike during the first quarter policy review,” said Nair.
Dealers said the rise in rates by RBI was not unexpected and bond prices may have been factored in the rate hike.
“The hike was factored in by the bond market,” said the treasury head of a large public sector bank. “There may be rise of four-five basis points in the yields on Monday morning, but it will come down subsequently. The continuation of liquidity support measures will be viewed positively by the market.”
In its previous monetary policy on April 20, RBI had said the thrust of its monetary policy was to anchor inflationary expectations and respond swiftly to any further build-up of inflationary pressures. It had promised to ensure sufficient liquidity and maintain interest rates consistent with price, output and financial stability. Its aim remains unchanged in the latest announcement.
