Lending rates will move up, though not immediately

Last Updated 27 July 2010, 12:55 IST

"Upward bias has definitely built up and now it all depends on credit offtake. Each bank will absorb it for now and put it into their calculation. Different banks have different profiles," said O.P. Bhatt, chairman of the largest lender in the country, State Bank of India.

"At SBI, we will be looking and thinking (at raising rates) over today and tomorrow," Bhatt said, adding the pressure on the lending rates will have been much more had RBI raised cash reserve ratio (CRR).

RBI Governor D. Subbarao further tightened the monetary policy Tuesday by raising the repurchase rate by 25 basis points to 5.75 percent and the reverse repurchase rate by 50 basis points to 4.50 percent with immediate effect.

"On the supply side the extra amount of liquidity has disappeared. But one also has to watch at what happens to liquidity when huge amounts of redemptions which are due in July takes place. And government spending fast picking because that can create some amount of liquidity," said ICICI Bank Chief Executive Chanda Kochhar.

"On the other hand, one needs to also look as to what happens to the credit offtake. When the upward bias in the interest rates translates into actual increase in interest rates will depend on how the demand and supply cross each other. My feeling is in the immediate future, you will not see an increase, but over a period you will," Kochhar told reporters.

Subbarao later in the day reiterated the bank chiefs' perception that credit would eventually become costlier.

"As credit demand picks up, we expect lending and deposit rates to go up," said Subbarao.

The government, however, said the increase in short-term rates will not have any effect on the credit and economic growth.

"Given both the trends in liquidity and prices, it was expected that RBI would tighten policy. I don't think it will have any adverse effect on the real economy," said Planning Commission Deputy Chairman Montek Singh Ahluwalia.

(Published 27 July 2010, 12:55 IST)

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