By Rajendra M Palande
LOOKING FOR low-interest home and car loans? You may want to banish the thought soon. There is every chance of banks succumbing to pressure from the Reserve Bank of India (RBI) to hike interest rates that, at one point, plunged as low as 8 percent. To rein in double-digit inflation, the RBI has raised policy rates more aggressively than anyone had expected. It’s been that way for five months now, and for July, inflation could be as high as 11 percent.
The reverse repo rate, at which the RBI absorbs excess funds from banks, was raised by 50 basis points to 4.75 percent and the repo rate, at which it injects liquidity, by 25 basis points to 5.74 percent. RBI Governor D Subbarao said in his policy review the banking system would remain in “liquidity deficit mode for now”. “In terms of quantum, the hikes reflect the central bank’s intention to ensure that excess liquidity does not dilute policy rate effectiveness,” says Wellian Wiranto, Singapore-based Asian economist at the Hong Kong and Shanghai Banking Corporation.
The banks are naturally sore. OP Bhatt, Chairman, State Bank of India, took no time to give his own opinion. “Further tightening of liquidity is undesirable,” he said. The large government borrowing in the first half of 2010-11 will put pressure on long-term interest rates, according to Alok Sahu, Head (Fixed Income), Baroda Pioneer Asset Management Company.
High deposit rates aim for fresh deposits so that peoples’ savings are not diverted to other avenues
The immediate pressure on banks will be to raise interest rates on deposits, as they would be short of liquid funds. Higher deposit rates will aim for fresh deposits, and to ensure that peoples’ savings are not diverted to other investment avenues. The increase in deposit rates will, in turn, force banks to raise interest rates on loans to individuals and companies.