Bankers fear another rate hike by RBI

 But they also think that there is a convincing macroeconomic case for policy rates to go up and the RBI may take a plunge.

There is a strong possibility that the RBI will raise both repo and reverse repo rates by 25 basis points (bps).

Repo rate is the rate at which RBI lends to commercial banks to enhance liquidity in the system and reverse repo is the rate at which RBI borrows money from banks, mainly to suck out liquidity. When RBI raises these rates, it signals a possible rate hike by commercial banks.

If rates are hiked it will be part of the RBI’s ongoing policy to fight inflation in the country by making money costlier. In the last one year RBI has raised rates eight times in small doses: repo rate from 5 per cent to 6.5 per cent (total 150 bps) and reverse repo from 3.5 per cent to 5.5 per cent (total 200 bps). “My feeling is that in view of the inflation rates continuing to remain high, RBI has no choice other than raising rates again,” said State Bank of Mysore Managing Director Dilip Mavinkurve.

Vijaya Bank Chairman & Managing Director Albert Tauro also feels that under  the normal circumstances RBI would have been forced to raise the rates, but in view of the recent agitations in the oil producing countries in the Gulf and the disaster in Japan, RBI now faces a very difficult choice. “Going by the headline inflation rate that still continues above 8 per cent, the RBI would like to increase rates. But since the Indian economy is now faced with additional challenges from Japan disaster and middle-east disturbances, making money costlier may add additional burden,” Tauro said.

Industry apprehensive

In fact in anticipation of rate hike, India Inc has already raised concerns. With the industrial production recording a small growth of 3.7 per cent in January, industry chamber Ficci suggested that RBI should avoid increasing the key rates as it would affect the industrial output.

“RBI will hopefully consider the impact of a further rise in interest rate on critical and interest sensitive sectors,” Ficci Director General Rajiv Kumar said. “Manufacturing capacity expansion may not be feasible in the light of rising cost of borrowing and increased competition within domestic market from imports,” CII Director General Chandrajit Banerjee said adding continued decline in capital goods was a matter of concern. Capital goods sector contracted by 19 per cent in January 2011.

Even if RBI raises rates, it will not lead to a hike in deposit and lending rates by banks immediately, said bankers. Mavinkurvesaid “as banks have raised deposit rates significantly in the last three months, I don’t think they would go for another round immediately. If at all, it may happen towards the end of April.”

Another reason for not passing on higher cost is that already the borrowing rates are quite high and corporates may not be in a position to absorb another rate hike, Tauro said.

Besides, the liquidity situation in the banking system, though still tight, has eased a bit in the last two to three weeks.