Interest Rates Set To Harden

The rupee stabilisation measures announced by the Reserve Bank are expected to lead to a hardening of interest rates, affect the government borrowing program but increase demand for credit in the system. Nationalised banks are waiting and watching the scenario before they take a final view on interest rates but private and foreign banks are likely to hike rates.

On the other hand, the prices of the government securities will see a steep fall and the over night call money rates are set to be traded above eight per cent. Besides, the market for certificate of deposits will be active while the market for commercial paper market will soon dry up till the liquidity is eased.

 

However, the banking sector is unlikely to hike deposit and prime lending rates immediately although there will be hardening of interest rates across the board, said senior officials State Bank of India, Bank of India and Bank of Baroda.

With the CRR hike, the cost of holding resurgent India bonds will go up making it tough for SBI to give the funds raised by it to other banks at 9.5 per cent. SBI's average cost for raising RIB is 8.5 per cent before the CRR hike.

Senior bankers said, "Despite the hike in CRR, there is sufficient liquidity in the system which does not call for an instant hike in lending and deposits rates. Besides the Bank Rate too is left untouched." By leaving the bank rate alone RBI has sent a signal that lending rates must not be touched.

Yet another factor that would prevent hike in lending rates is the inflow of rupee through the Resurgent India Bonds. The bonds have already mopped up over US $ 3 billion and SBI has announced intentions to bring in around 75 per cent of the total proceed in the country. This will ease the liquidity in the system and thus the measure taken by the RBI will be neutralized.

However, according to market circles, foreign banks and private sector banks are likely to increase their deposits rates and PLR as they may feel the pinch of squeeze in liquidity.

"Interest rates will go up across the board, while PLR may go up by nearly 50 basis points. But, banks will wait and watch the situation before hiking rates," said S Solomon Raj, managing director of IndusInd Bank.

"RBI has taken the measure to curtail speculation in forex market as they suspected that the liquidity in the system was moving towards the forex market making the rupee weaker against dollar," A K Dam, executive director UTI Bank.

The government borrowing programme too is expected to take a hit as the interest rates are set to raise with liquidity being sucked out of the system. Similar measure announced in January did not affect government borrowing programme since RBI has almost completed the entire borrowing programme, which is not the case this time.

Meanwhile, the rise in the call money rates will see the CD market in limelight while the CP market will not be active. bankers said, earlier, banks would borrow from call money market to meet their requirement and thus the CD market remained inactive, but with tightening of the inter bank money market, banks would raise money through CD to meet their requirements.

"In case of CP market, earlier banks borrowed from the call money market to fund the corporates through CP. But with call money touching 10 per cent, banks would not prefer to borrow from call money to supply funds for the CP market. In effect the banking sector may see offtake in credit," said a senior banker from nationalised bank.