Rates unchanged, RBI hints at tightening

Rates unchanged, RBI hints at tightening
The Economic Times, July 29, 2009, Page 1

Pegs Growth Rate At 6%, Prods Banks To Lend

Our Bureau MUMBAI

INDIA Inc should take the hint. While prodding banks to cut rates and assuring easy money to stoke growth, the Reserve Bank of India (RBI) indicated on Tuesday that interest rates will not remain low forever and banks will not continue to sit on a mountain of cash.

As inflation rises, interest rates will harden and the surplus money sloshing around in the system will be mopped up by RBI. But till there are “robust signs of recovery”, the central bank has promised liquidity to help a decent GDP growth, which it has pegged at 6% with an upward bias. RBI’s decision to keep key interest rates unchanged in Tuesday’s quarterly monetary policy statement perhaps marks the end of a rate-cut cycle.

In the policy document, RBI governor Duvvuri Subbarao said, “The accommodative monetary stance is not the steady state stance. On the way forward, RBI will have to reverse the expansionary measures...The exit strategy will be modulated in accordance with the evolving macroeconomic developments.”

No one knows when the U-turn will happen, but the money market is already talking about a rate hike next year. “I think the central bank will hike interest rates in April...It will watch inflation, particularly food prices, very carefully and move swiftly when it goes for an unwinding,” said Pradeep Madhav, MD of the biggest bond house, STCI Primary Dealer.

In the next few weeks, only a few banks may give in to RBI’s persuasion and go for a token rate cut.

BEHIND CLOSED DOORS

Guv: There’s room for lending rates to come down
Bankers: But we won’t be able to cut rates further... look at corporates, they haven’t cut prices. Overall demand will rise when companies also lower prices of their products

Guv: So far, lending rate cuts have been less than adequate...
Bankers: Not exactly. A comparison of this quarter’s corporate numbers with the preceding quarter and June ‘08 will show that interest cost has come down

Guv: Loans are getting restructured, so what’s the view on credit quality?
Bankers: Non-performing assets could rise in a few sectors, but bad loans will not go up to the extent the market fears

Guv: Infrastructure projects are a must to boost growth. Can you fund them?
Banks: One-year deposit is as high as 72% of total liability, compared to 52% a few years ago... depositors are not renewing their money with banks. It’s tough to fund long-term assets with such short-term liabilities