Mukherjee, banks differ on liquidity, rate hike plan | business | Hindustan Times
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Mukherjee, banks differ on liquidity, rate hike plan

business Updated: Aug 14, 2010 20:09 IST
Finance Minister Pranab Mukherjee

Finance Minister Pranab Mukherjee said Saturday that banks will not raise their interest rates in response to the Reserve Bank of India's (RBI) tight monetary policy but the country's top lenders choose to differ.

"There is an upward pressure on interest rates and I think it will take place soon," State Bank of India chairman O.P. Bhatt said, to a query whether the country's largest lender planned to raise interest rates.

He said the RBI's tight monetary policy had put pressure on liquidity in the system. "Liquidity is there, but it is less," Bhatt added.

In a bid to control the spiralling inflation, the RBI has raised reverse repo rate (the rate at which RBI borrows money from banks) by 125 basis points, and repo rate (the rate at which the central bank lends money to bank), cash reserve ratio and statutory liquidity ratio by 100 basis points each since March.

The most recent hike was on July 27, when the central bank raised the short-term borrowing rate by 50 basis points and lending rate by 25 basis points.

Earlier in the day, Finance Minister Pranab Mukherjee told reporters that there was enough liquidity in the system and banks won't hike interest rates.

"No, I don't think so. Banks are fully aware of it and they have taken note of it," he said to questions whether banks will raise their lending rates in response to the RBI's tight monetary policy.

Mukherjee said the public sector banks had adjusted their plans according to the RBI's policy and need not hike their lending rates.

Bank of Baroda's chairman and managing director M.D. Mallya also chose to differ with the finance minister's remark on interest rates hike. "RBI's tighter monetary policy has indeed put pressure on liquidity and interest rates," Mallya told IANS.

Bank of Baroda has already hiked its benchmark lending rate by 50 basis points.

Several other public sector banks have also raised their benchmark lending rates in response to the RBI's July 27 hike in repo and reverse repo rates. Punjab National Bank, the country's second largest lender, has increased its benchmark prime lending rate by 75 basis points. This is the sharpest increase among all lenders.

The Corporation Bank and Oriental Bank of Commerce have also increased their benchmark lending rates by 50 basis points.