Rates could rise after Diwali, says SBI chief

Rates could rise after Diwali, says SBI chief
The Financial Express, July 14, 2009, Page

fe Bureau, Kolkata

State Bank of India chairman OP Bhatt on Monday hinted at the possibility of interest rates rising after October if liquidity in the system is not managed well.

“If there is huge amount of credit growth, which will happen with economic growth picking up, interest rates will go up. If liquidity is not managed well, interest rates may go up by 25 to 100 basis points. Maybe that will happen after Diwali,” Bhatt said.

Bhatt made the comments at a banking conclave organised by the Federation of Indian Chambers of Commerce & Industry, in the city.

The comments by the chairman of India’s largest bank is significant, made a day after finance minister Pranab Mukherjee assured private investors that large government borrowing will not stifle fund availability for the private sector.

“Borrowers will not have to pay a higher interest rate for their loan and the private sector will not be crowded out by the government borrowing,” he said. Industry and banking circles have been concerned about the finance ministry’s plans to borrow Rs 3,97,957 crore in fiscal 2009-10 to meet government expenditure. The ministry has projected a 52% rise in net market borrowing over the Rs 2,61,972 crore it raised in 2008-09, as tax receipts are expected to decline by 2% year-on-year.

In a tight credit market, when the government borrows more, there is less space left for the private sector to raise funds. The bond market, which had cooled after Mukherjee’s statement, is expected to flare up again. When government borrows more, the prices of its paper dip because of over-supply and the yields rise. Mukherjee’s comments had pacified the markets on Monday, with the yields on the benchmark 10-year paper declining to 6.79% from 6.90 % on Friday.

Mukherjee also said the government is working in close cooperation with the central bank. “There is no inherent contradiction that we are pursuing or following with RBI in reference to the annual monetary and fiscal policies. We are working in close cooperation. We have done it during the worst period of the present crisis,” he said.

Bhatt said SBI has seen a marginal rise in its credit of about Rs 5,000 crore quarter-on-quarter for the April-June period this fiscal. The bank’s liquidity level, he said, is comfortable level and the “NIM (net interest margin) will not get hit.”

SBI, meanwhile, is looking at measures to improve its compliance with the Community Reinvestment Act after the Federal Deposit Insurance Corporation (FDIC) of Chicago has rapped the bank.

FDIC has urged the bank to improve the performance of its Chicago unit to meet local credit needs more. On the question of a possible acquisition in Indonesia and African countries, Bhatt said the bank is not looking at any such acquisition at present.