Date:26/07/2006 URL: http://www.thehindubusinessline.com/2006/07/26/stories/2006072605021300.htm

Back RBI move to check inflation

Our Bureau

The Reserve Bank of India's move to raise short-term rates by 25 basis is being seen by banks as a pre-emptive measure to control inflation. Though it is unlikely to up deposits, lending rates may inch up, say bankers.

DR A.K. KHANDELWAL

Mumbai , July 25

The RBI move to raise short-term rates by 25 basis is being seen by banks as a pre-emptive measure to control inflation.

"The policy is on expected lines, keeping in view global factors, because we are no longer insulated from the rest of the world," said Dr A. K. Khandelwal, Chairman and Managing Director, Bank of Baroda.

"The increase in short term interest rates would be useful in arresting the decline in external value of rupee and maintaining the level of foreign investment flow," said Mr V. P. Shetty, Chairman and Managing Director, IDBI Ltd.

What one needs to watch out for are the credit quality, further increase in oil prices, plus the lagged second order effects of oil prices and geopolitical tensions. Markets should view the RBI Governor, Mr Y.V. Reddy's statements as a timely measure, said Mr Vishwavir Ahuja, Managing Director and CEO, Bank of America, India.

Impact on rates

"Though the market interest rates may not change immediately, banks may take a re-look at their deposits and lending rates depending upon their need for liquidity," Mr Shetty said. "IDBI's Asset Liability Management Committee will meet shortly to consider the likely impact of the increase in reverse repo rates and take a view on its deposit/lending rates, keeping in view all the relevant factors," he said.

Dr Khandelwal said there is pressure on banks to maintain the Net Interest Margin. "The funding cost is rising and there is a case for banks to raise rates. I think there are very good reasons to have a hard look at the prime lending rates," he said.

The banking sector is expected to react by factoring in this 25 bps hike in its interest rates for short-term deposits and short-term loans (i.e., with tenors below one year), said Mr Bhaskar Ghose, Managing Director, IndusInd Bank. " However, medium-term rates are unlikely to be affected, unless the Fed Reserve raises its rates in August, prompting RBI to follow suit in October ," he said.

Pressure on fund cost

"The rate hike will put pressure on banks' cost of funds and on how we price to our customers, said Mr Neeraj Swaroop, CEO-India, Standard Chartered Bank. "Any decision on re-pricing would be a function of how the market behaves. We will review consumer and wholesale loans and deposits and take a call shortly," he said.

"The earlier rate hike in June triggered enough corrections in the interest rates. This time a correction may be seen in sensitive areas such as large home loans by 25-50 basis points," said Mr Rana Kapoor, Managing Director and CEO, Yes Bank. "At Yes Bank, we would deliberate over the decision for the next two days and if a rise takes place, it would be within the range of 30-45 basis points, in case of deposit rates," he said.

Unlikely to push up deposits

The raise is unlikely to show up immediately as an increase in Bank Deposit rates as these have already moved up substantially over the last six months, said Mr Shailendra Bhandari, Managing Director & CEO, Centurion Bank of Punjab.