Bankers wait for RBI stance on interest rates

With financial year 2007-08 passing by, banks are relieved from the year-end pressure to raise resources for lending. But thanks to high inflation, this may not translate into lower interest rates in the short term for lending as well as
deposits.

Usually, the credit demand is quite lean in the first quarter (April-June) of a financial year and there is consequently less pressure to generate deposits.

In addition, the resource position in the system is comfortable as the government begins spending without having fiscal targets in the immediate sight. Also, state governments step up expenditure during the dry season and these measures create liquidity.

Bankers say the expectation of easing of deposit and lending rates was something that they shared till the first week of March. With inflation now touching a 13-month high of 6.68 per cent, the outlook has changed completely.

In fact, they see signs of hardening of rates, though the final decision will depend on signals that come from the Reserve Bank of India over the next few weeks. The central bank is due to announce its credit policy on April 29.

"RBI's stance in the monetary policy to curb inflation would influence decisions on interest rates," Bank of India Chairman and Managing Director T S Narayanasami said.

Concurring with the trend of hardening rates, Indian Overseas Bank Chairman and Managing Director S A Bhat said banks might adopt a wait-and-watch stance till RBI elaborates its stance in the monetary policy.

A senior Union Bank of India official said the rate should firm up in the near future. "There is no way that rates will come down when the inflation is up," he said.

Pointing to a drop in pressure on raising resources, which happens at the start of the new financial year, Federal Bank General Manager Thomas Joseph said rates were likely to remain constant in coming months.

With inflation staring in the face, IDBI has already decided to keep the cut in prime lending rates on hold. On March 29, IDBI deferred its earlier decision to cut PLR by 50 basis points.

This was the first sign of an adverse impact of a sharp rise in inflation on the banking sector. Mumbai-based public sector bank had informed on March 26 that it would reduce the PLR by 50 bps from 13.25 per cent to 12.75 per cent from April 1.

"Keeping in mind the rise in inflation and the finance minister's statement to take steps to contain the price rise, the bank has decided put on hold our earlier decision on the benchmark prime lending rate," IDBI Chairman and Managing Director Yogesh Agarwal said. It will monitor developments before taking a call on the lending rate.

However, Kolkata-based Allahabad Bank has cut its PLR by 25 basis points to 13 per cent. The reduction became effective from Tuesday.