The Hindu Business Line : Interest rates may harden, say bankers

BANKERS and analysts expect interest rates to go up at least by 50 basis points, in the current fiscal, in view of the expected eight per cent growth in GDP, and the hardening trend in global interest rates.

According to them, a healthy credit growth in corporate and retail sectors coupled with inflation that is inching up are the factors that could lead to hardening of rates. But, as liquidity is comfortable, rates seem stable in the short-term, they said. Most bank officials feel that credit growth may overtake deposit growth. However, they ruled out a severe asset-liability mismatch.

Money market dealers expect a 25 per cent rise in reverse repo in the coming Credit Policy to be announced later this month.

Globally, the rates are hardening with the US Federal Reserve recently hiking the rates by 25 basis points to 3.75 per cent.

According to Mr V.K. Chopra, Chairman and Managing Director, Corporation Bank, there is a case for interest rates going up. An increase of 50 basis points is likely by March 2006, as lending rates will have to be in alignment with the cost of funds. However, he ruled out any hike in deposit rates saying they are already at `good levels.'

At a recent banking seminar in Mumbai, Ms Kalpana Morparia, Deputy Managing Director, ICICI Bank, said interest rates could rise by 50 basis points in this fiscal. The overall rise in credit demand could be 23 per cent to 25 per cent, she said.

An analyst with global rating agency Standard and Poor's recently said that increase in domestic inflation, rise in global interest rates and stronger credit demand could push up interest rates.

Bankers see that growth in credit could be much higher than the growth in deposits.

For instance, Mr Chopra said that credit growth in Corporation Bank may be at 23 per cent to 25 per cent, while deposit rate may be at 15 per cent to 16 per cent. When asked about the mismatch in assets and liabilities growth, Mr Chopra said, "I can always raise large deposits, if I have the opportunity to deploy them immediately."

Mr Cherian Varghese, Chairman and Managing Director, Union Bank of India, said that bank deposits should be made more attractive as they are vital for banks to raise funds to meet growth. "As of now, there is no pressure on deposits. But, bank deposits should be given some incentives."

Union Bank is likely to see credit growth of more than 30 per cent, and a deposit growth of around 15 per cent in the quarter ended September 30, 2005, he said.

Dr K.C. Chakrabarty, Chairman and Managing Director, Indian Bank, said that banks would take the cue for interest rates from RBI. "Interest rates will depend on the general signal by the central bank. If RBI does not change the rate, we also will not change the lending rate."

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