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Banks to raise interest rates if funds shortage persists

Interest rates are likely to rise further if the banking system continues to remain short of funds for more than a month, reports BS Srinivasalu Reddy.

india Updated: Oct 02, 2008 22:01 IST
BS Srinivasalu Reddy

Interest rates are likely to rise further if the banking system continues to remain short of funds for more than a month. Banks are holding back lending rate increases despite rising cost of funds in the hope that the funds shortage would ease sooner.

More than two-thirds of the banks on Wednesday borrowed money from banks which had excess funds at rates as high as 17.5 per cent, to meet reserve requirements. Funds-starved banks also borrowed over Rs 90,000 crore from the Reserve Bank of India (RBI) at 9 per cent, under liquidity facility provided by the central bank.

“This is only a temporary problem,” said PL Gairola, CMD, Dena Bank. “(It is) not necessary to hike rates now. If the shortage continues, then only the question (of raising interest rates) arises.”

MD Mallya, CMD, Bank of Baroda said it was difficult to predict rate hikes at this juncture. “Once government spending begins, the advance tax funds (that went into government coffers last month) will come into circulation, easing the liquidity.”

About Rs 45,000 crore moved out of the banking system as companies paid second quarter advance tax in September. Bankers hope the government will start spending this money resulting in the funds flowing back into the banking system. Though the Reserve Bank of India wants to contain the year-on-year credit growth at 20 per cent, credit expansion continues to be robust at 26 per cent.