After 3 months of rate activism, a pleasant pause

The RBI’s decision to leave key rates unchanged came as a pleasant surprise to the markets...

The RBI’s decision to leave key rates unchanged came as a pleasant surprise to the markets, which had for days been fearing a further hike in the repo rate and the mandatory bank cash reserve ratio (CRR). In the last three months, the CRR and repo rates were hiked twice, and moved from 5.5 per cent and 7.25 per cent to 6.5 and 7.75 per cent respectively.

The banks followed these revisions with increase in interest rates, which raised the cost of borrowing for consumers and the industry. This also impacted the loan markets for cars, homes and personal borrowing.

One reason why the RBI has not played with the interest rates this time is that inflation has remained largely under control on account of the rising interest rates. Said CII president R Seshasayee, “Under the current circumstances, the RBI governor could not have announced a more appropriate monetary policy. With no upward increase in key rates, the RBI has sent a clear indication that it would like to see the effects of the earlier rate hikes play out before taking any further measures.”

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He said it is an indication of the RBI’s acknowledgement that growth cannot be traded off in the fight against inflation. “The credit policy is good for the economy and it has inflation-control mechanisms coupled with growth,” said PNB chairman and managing director S C Gupta.

Even though the RBI has projected a GDP growth rate of 8.5 per cent for the financial year 2007-08, there are concerns on the issue, said ICRIER director Rajiv Kumar. “The credit policy is a balanced one but I am not sure if the projected growth rate of 8.5 per cent is achievable and expect it to be between 7.5 and 8 per cent. Growth will be impacted by decreasing demand and falling exports,” Kumar added.

During 2006-07, aggregate deposits at scheduled commercial banks rose by 23 per cent against 18.1 per cent a year before. Non-food credit grew by 28 per cent in 2006-07 against 31.8 per cent ayear ago. There has, thus, been moderation in credit growth and increase in deposit growth. Credit growth is expected to be at 23- 24 per cent and deposits have been projected at around Rs 4.9 lakh crore for this fiscal.

The RBI also took a step that is likely to boost non-banking financial institutions (NBFCs). It raised the ceiling on the interest payable by NBFC’s on deposits from 11 per cent to 12.5 per cent. This will put banks at a disadvantage.

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“If these players increase their deposit rates, it will impact the banks. But since NBFCs’ presence is limited, it will not pose a threat to big banks,” said PNB’s Gupta.