With credit offtake remain robust despite recent increases in cash reserves by the Reserve Bank of India, bankers feel that the central bank may use administrative measures to increase rates on retail and consumer loans such as credit card charges in its monetary policy review due on Wednesday.
Adminstrative measures include steps such as tightening sector-specific risk weightages on loans to caution bankers whose cost of funds will go up.
Bankers say in a bid to slow down credit disbursements in the consumer and retail segments, the RBI may increase the risk weightage on these segments.
This would finally push up interest rates on homes credit cards, consumer goods and cars.
Leading bankers, however, feel that the overall interest rate might remain unchanged or that the RBI may only marginally tweak the short-term rate (repo rate) by 25 basis points (0.25 percentage points).
There are chances that RBI may also spelt out a roadmap to reduce the SLR (statutory liquidity ratio) under which banks are obliged to park a proportion of their deposits in government-approved securities.
"It may not happen immediately, but the RBI may give a roadmap to reduce the SLR by around 25 basis points, to avoid any uncertainty on liquidity. This in turn will release around Rs 6,000 crore in the system," said the CEO of a leading private sector bank. However, the RBI will ensure that extra liquidity does not go into retail and consumer loans.
Currently, credit is growing at around 28 per cent; one quarter of this is due to an explosive growth in consumer and retail loans.
Since inflation is the biggest concern for the RBI, it is a paradoxical situation for the central bank on how to manage a higher GDP growth of 8 to 9 per cent while keeping inflation under control, bankers said.
"The government has already taken certain fiscal measures to bring down inflation. The RBI is expected to roll out new policy measures where credit demand should slow down without affecting the long term investment in sectors like manufacturing, infrastructure and agriculture," said the chief executive of a public sector bank, who did not want to be identified.
More importantly, in March, the inflation is expected to come down due to the base effect linked to prices in the previous year.
"In case the RBI raises the interest rate the actual impact will come in three to four weeks," said one banker, adding that long-term core sector investments may be affected as a consequence. RBI would also weigh in the government's fiscal measures in deciding its own course, he added.
"The economy is currently growing at 9 per cent. If RBI tightens the money supply further and increases the interest rate also, it will stifle the growth rate," said a top banker.
"It is paradoxical situation to control the inflation which is a prime objective of the central bank while creating a conducive environment to bolster long term investments in infrastructure, manufacturing or agriculture," said another bank CEO.