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Interest rates to stay put

business Updated: Jan 30, 2010 00:50 IST
HT Correspondent
HT Correspondent
Hindustan Times
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Borrowers can breathe easy. Loans are unlikely to get costlier, at least in the next three months.

The Reserve Bank of India (RBI) on Friday kept interest rates on hold, but announced measures to draw off excess money from the system to tame prices.

RBI hiked the cash reserve ratio (CRR) — the proportion of funds commercial banks have to park with the central bank — by 0.75 percentage points to 5.75 per cent.

This would suck out Rs 36,000 crore of liquidity from the financial system emphasising the need to rein in prices.

India’s wholesale inflation rose by 7.3 per cent in December. This has forced the government to shore up supplies of staple items such as sugar to cool drought-related surge in food prices.

RBI forecast inflation to touch a worrisome 8.5 per cent by end-March largely because of rising commodity prices.

“The decision (on withdrawing liquidity) is similar to the war of Mahabharata, where after entering Chakravyuha (labyrinth) coming out is difficult,” said RBI governor D. Subbarao.

RBI kept the repo rate — the rate at which banks borrow from the central bank — unchanged at 4.75 per cent.

An increase in the repo rate carries the risk of upsetting the nascent recovery in the broader economy by raising the cost of borrowing for the industry and individuals.

Bankers said lending rates are unlikely to rise in the short-term.

“We have got so much liquidity it does not impact us at all in terms of there being any pressure on interest rates for our borrowers,” said O.P.Bhatt, chairman, State Bank of India.

RBI projected the Indian economy to growth by 7.5 per cent in 2009-10, higher than 6 per cent growth rate in had forecast in October.”

Growth of the Indian economy slowed to 6.7 per cent in 2008-09 after rising at close to 9 per cent for four straight years before the meltdown hit home.

Analysts, however, said interest rates could start rising by April.

“There may be a rise in the repo rate by April,” said Abheek Barua, chief economist, HDFC Bank. “Once the repo is raised, the home loan and car loan rates are likely to move up.”

Economists expect upward revision in interest rates through the year. “The RBI will hike policy rates by at least 1.25 percentage points this year,” said Rohini Malkani, economist at Citi India.