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Banks may absorb hike

The hike in the cash reserve ratio by half a percentage point is expected to delay the benign interest rate regime as banks, which were planning to soften rates, will hold back, reports Arun Kumar.

india Updated: Oct 30, 2007 22:57 IST
Arun Kumar

The hike in the cash reserve ratio by half a percentage point is expected to delay the benign interest rate regime as banks, which were planning to soften rates, will hold back.

Given the liquidity in the system and the sharp rise in portfolio investments, there was pressure to reduce interest rates prior to the Reserve Bank’s policy announcement, said Deepak Parekh, chairman of HDFC Ltd, the country’s largest mortgage lender. But soft rates would have added to inflationary pressure, he pointed out.

“There is sufficient liquidity in the system for banks to absorb the additional requirement,” Parekh added. The cash reserve ratio hike is expected to suck out Rs 15,000 crore from the banking system.

“The policy has to be seen in the context of what happened during this quarter. There is huge liquidity and it is a matter of concern,” State Bank of India Chairman OP Bhatt said. For now, his bank, the country’s largest, is not raising rates but Bhatt admitted there was pressure on margins.

Chanda Kochar, joint managing director of ICICI Bank, echoed this view. “There should not be much change in interest rates," she pointed out.

Asked whether a further rate cut by the US Federal Reserve on Wednesday would have a bearing on the dollars foreign funds were bringing into the country’s stock markets, Parekh said the valuation of Indian stocks was already high and this would eventually moderate the flow.