Bankers expect the Reserve Bank of India (RBI) to resort to further monetary tightening by increasing policy rates as well as the cash reserve ratio (CRR) to tame inflation.
A further increase in repo and reverse repo rates was expected following RBI’s decision to raise these last month. With liquidity remaining high, banks now expect the central bank to raise CRR too.
The central bank is due to unveil its annual policy statement on April 20. At a pre-policy meeting with bank chiefs today, RBI made it clear that inflation concerns reign on its mind. Besides, it is drawing comfort from the fact that the economy seems back on a firm footing. Bankers told RBI the economy appeared poised to grow by 8.5 per cent in the current financial year.
“Inflation is a matter of concern because the numbers are much higher than what RBI has projected. Monetary action may focus on containing inflation. Growth should be intact, as the priority is to contain inflation,” Union Bank of India’s Chairman and Managing Director M V Nair, who also heads the Indian Banks’ Association (IBA), told reporters after the meeting.
Inflation based on the wholesale price index was estimated at 9.89 per cent at the end of February and was widely expected to cross 10 per cent in March, against RBI’s earlier estimate of 8.5 per cent.
With prices rising, RBI had increased the CRR by 75 basis points to 5.75 per cent. It also surprised the market by announcing an increase in repo and reverse repo rates by 25 basis points each. The market was surprised at the timing, as the central bank had earlier said “a mid-policy action is really in response to a completely unanticipated event”.
While CRR is used to manage liquidity, an increase in policy rates signals a rise in interest rates in the system. Repo is the rate at which banks borrow from the central bank, while reverse repo is the rate at which RBI borrows from banks, using it to suck out excess liquidity.
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But, bankers said despite any increase in CRR, there would be sufficient liquidity to support credit growth, which is likely to be far better in the current financial year than the previous one.
“On the liquidity front, there is general consensus that there will be reasonable liquidity to support credit growth,” Nair said, adding that most banks see credit growth of 20-22 per cent this year. In 2009-10, it was about 16 per cent, the lowest in several years.
Federal Bank Managing Director and CEO M Venugopalan said credit growth had already started to pick up and would improve further in the second quarter.
But, an increase in CRR would further impact the margins of banks. These have come under stress as banks have to, from April 1, calculate interest on savings bank accounts on a daily basis.
“There will be pressure on margins because of this interest on savings bank (deposits) and in case cash reserve ratio goes up, because there is a cost involved. From the bankers’ side, that was the concern,” Nair said.
He also said some banks had expressed concern on asset quality and said some more restructured assets would become non-performing. However, a section of bankers believe the level of NPAs would come down, as economic and industrial activity is expected to be robust.
Following the global financial crisis, Indian banks were allowed, as a one-time measure, to restructure loans without classifying the account as sub-standard. The restructured account in the standard category constituted 3.1 per cent of the gross advances as on December 2009.
Apart from Nair and Venugopalan, others present included State Bank of India Chairman O P Bhatt, ICICI Bank Managing Director and CEO Chanda Kochhar, HDFC Bank Managing Director Aditya Puri, Bank of Baroda Chairman and Managing Director M D Mallya and Canara Bank Chairman and Managing Director A C Mahajan.