Interest rates unlikely to rise
Times of India, January 19, 2010, Page 21
Prabhakar Sinha, TNN
NEW DELHI: Interest rates are unlikely to firm up even if RBI raises key rates to contain inflation, feel bankers.
In its forthcoming review of the credit policy on January 29, it is believed that RBI will increase the cash reserve ratio (CRR) — the proportion of deposits that banks are required keep with the central bank — by about half a percentage points to contain the soaring inflation.
However, bankers feel that RBI would leave the other two rates — repo and reverse repo — unchanged. Repo rate is the interest rate at which central bank, RBI, lends short term funds to bank. At present, repo rate is at 4.75%. Reverse repo rate is the rate at which banks park their surplus funds with the central bank, which is at 3.25%.
Union Bank of India chairman and managing director M V Nair though refused to speculate on the issue of measures that would be taken by RBI in its review of the credit policy, however, said that it would not lead to increase in the interest rates as there is enough liquidity in the system. Another CMD of a public sector bank said that over a period of time, adopting easy money policy, banks have already cut the deposit rates, which has brought down the cost of funds for them. In near future, the cost structure of funds is not likely to change, he argued. Therefore, he said that in the forthcoming credit policy, even if RBI takes certain measures to control the inflationary expectations, the interest rates are not likely to move up.
According to the latest data, banks are parking around Rs 70,000 crore surplus funds with the RBI at only 3.25% interest rate as against the cost of funds at around 6%. A senior banking official said that even if RBI raises the CRR by half a percentage points, it will suck only around Rs 21,000 crore from the system.
However, as annual inflation has crossed 7% mark, which is higher than central bank's projection of the inflation at 6.5%, bankers feel that the central bank would take measures to squeeze surplus liquidity, which has given rise to inflationary expectations. But this would not affect the availability of funds to lend in the market place, bankers argue.
Since April 2009, in the first nine months of the current financial year till January 1, 2010, while the deposits have grown by Rs 4,30,430 crore, the credit offtake by corporate houses and individuals is only Rs 2,45,258 crore. In fact the condition was even worse a fortnight back. Till then the credit offtake was only at around Rs 1,65,000 crore. In the last fortnight, the credit offtake has shown some signs of recovery when it grew by Rs 79,515 crore.
A senior government official said that a measure leading to rise in the interest rate will be counterproductive and will affect the economic recovery adversely.
Times of India, January 19, 2010, Page 21
Prabhakar Sinha, TNN
NEW DELHI: Interest rates are unlikely to firm up even if RBI raises key rates to contain inflation, feel bankers.
In its forthcoming review of the credit policy on January 29, it is believed that RBI will increase the cash reserve ratio (CRR) — the proportion of deposits that banks are required keep with the central bank — by about half a percentage points to contain the soaring inflation.
However, bankers feel that RBI would leave the other two rates — repo and reverse repo — unchanged. Repo rate is the interest rate at which central bank, RBI, lends short term funds to bank. At present, repo rate is at 4.75%. Reverse repo rate is the rate at which banks park their surplus funds with the central bank, which is at 3.25%.
Union Bank of India chairman and managing director M V Nair though refused to speculate on the issue of measures that would be taken by RBI in its review of the credit policy, however, said that it would not lead to increase in the interest rates as there is enough liquidity in the system. Another CMD of a public sector bank said that over a period of time, adopting easy money policy, banks have already cut the deposit rates, which has brought down the cost of funds for them. In near future, the cost structure of funds is not likely to change, he argued. Therefore, he said that in the forthcoming credit policy, even if RBI takes certain measures to control the inflationary expectations, the interest rates are not likely to move up.
According to the latest data, banks are parking around Rs 70,000 crore surplus funds with the RBI at only 3.25% interest rate as against the cost of funds at around 6%. A senior banking official said that even if RBI raises the CRR by half a percentage points, it will suck only around Rs 21,000 crore from the system.
However, as annual inflation has crossed 7% mark, which is higher than central bank's projection of the inflation at 6.5%, bankers feel that the central bank would take measures to squeeze surplus liquidity, which has given rise to inflationary expectations. But this would not affect the availability of funds to lend in the market place, bankers argue.
Since April 2009, in the first nine months of the current financial year till January 1, 2010, while the deposits have grown by Rs 4,30,430 crore, the credit offtake by corporate houses and individuals is only Rs 2,45,258 crore. In fact the condition was even worse a fortnight back. Till then the credit offtake was only at around Rs 1,65,000 crore. In the last fortnight, the credit offtake has shown some signs of recovery when it grew by Rs 79,515 crore.
A senior government official said that a measure leading to rise in the interest rate will be counterproductive and will affect the economic recovery adversely.
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