Bankers see hike in short term interest rate by RBI

Bankers expect RBI to hike its short term interest rates by 0.25% next week to contain price rise as economic growth.

india Updated: Apr 14, 2006 12:47 IST

Bankers expect Reserve Bank of India to hike its short term interest rates by 0.25 per cent next week to contain price rise as economic growth and credit demand continues to be robust.

Cash Reserve Ratio at 5 per cent is likely to be left untouched as the liquidity situation had improved, they said on the forthcoming RBI annual monetary policy to be announced on April 18.

"There could be a 0.25 per cent increase in rates (repo and reverse repo - the rates at which RBI buys and sells funds)," Oriental Bank of Commerce chairman KN Prithviraj said.

RBI had raised reverse repo, the rate at which it absorbs funds from banks, by 0.25 per cent in January to 5.5 per cent, citing upward movement in prices of property, equity and gold.

The central bank had also raised repo rate, the rate at which it lends overnight funds to banks, by 0.25 per cent to 6.5 per cent.

However, Prithviraj said stability in interest rate is likely to be accorded priority in the monetary policy.

"Interest rate is not a concern at the moment as liquidity situation has improved since March," he said.

ICICI Bank executive director Nachiket Mor said, "I do not know if the rates will be raised or not. But, given the robust economic development and credit demand, I will be surprised if interest rates stay where they are".

Though the liquidity situation has improved a little, Mor said there was some pressure on interest rate and it could move upward as both corporate and retail lending was witnessing strong growth.

The market also expects the central bank to raise the key short term rates.

"The market expects both repo and reverse repo hike," Punjab National Bank general manager Arun Kaul (treasury and finance) said.

RBI had absorbed about Rs 49,000 crore from banks on Wednesday, which indicated that liquidity situation has improved in the short run.

First Published: Apr 14, 2006 12:47 IST