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Bank of England move triggers rate rise fears

A cross section of bankers feel that a crunch in global liquidity will have affect Indian markets, reports Arun Kumar.

india Updated: Jan 11, 2007 21:12 IST
Arun Kumar

The Bank of England’s surprise move on Thursday to raise its benchmark interest rate by 25 basis points (0.25 percentage point) to 5.25 per cent, is expected to impact the interest rate scenario in India.

A cross section of bankers feel that a crunch in global liquidity will have direct bearing on Indian environment.

“Since liquidity in the banking system has dried out, any hardening of interest rates in the overseas market may force a further rise in domestic interest rates,” said the chairman of a leading public sector bank on condition of anonymity.

In fact, Bank of England was not expected to hike the rates, although bankers have been expecting that the European Central Bank would raise its rates on Friday at a scheduled meeting.

"In the given scenario, it is expected that Reserve Bank of India may increase the repo rate by 25 basis points,” said a leading banker. Because of the increase in the cash reserve ratio (CRR), commercial banks are currently borrowing more than Rs 7000 crore from the RBI at a repo rate of 7.25 per cent.

“Only last month, the situation was the opposite when there was a surplus liquidity of more than Rs 15,000 crore,” said the banker.

In the fourth quarter (January–March), demand is normally at its peak because of export credits and fiscal year-end demand. "The regulatory measures have impacted the liquidity in the system. There is a growth in deposits but it is still not in proportion to credit demand," said KN Prithviraj, chairman and managing director of Oriental Bank of Commerce.

Prithviraj said that much in the rates would depend on the regulators (RBI). However, since India is currently in a growth phase, there would not be much impact on the demand as the result of a marginal increase in the interest rate, he said.

Another leading banker who did not wish to be identified said RBI may increase the reverse repo rate ( the rate at which RBI accepts deposits from banks) to at least 6.25 per cent from thecurrent 6 per cent.

“Since the repo rate (rate at which bank borrow from RBI) is currently at 7.25 per cent the gap between the two ( reverse repo rate and repo rate) is 1.25 per cent. It should come down to one per cent. This will further increase the pressure on interest rates,” the banker said.

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