Bankers divided on rate hike

Banking community united on cash reserve ratio status quo.

The banking community is vertically divided on the prospect of a hike in key policy rates by the Reserve Bank of India in its credit policy to be announced on Tuesday, even as an overwhelming majority of bankers feels that the cash reserve ratio (CRR) will not be cut to infuse additional liquidity into the system at this juncture.

Business Standard conducted a snap poll of bankers on key monetary issues "" interest rate, CRR and credit offtake "" 48 hours ahead of the RBI's policy announcement. Twenty-five bankers, including the heads of some banks, executives of treasuries and fund managers participated in the poll.

A near-consensus has emerged among senior bankers and treasury heads that the RBI will take steps to rein in the unbridled credit growth when it unveils its 2006-07 annual credit policy.

They admit that the RBI's pre-emptive tightening via a 25-basis-point hike in the reverse repo rate in January 2006 had failed to check credit growth despite a liquidity squeeze.

About 90 per cent of the respondents (22 out of 25) said the RBI would not cut CRR. Even the three respondents, who were not against the CRR cut, said the central bank might announce a two-phase CRR cut schedule which would take effect at a later stage.

Thirteen out of 25 respondents said the RBI would hike the reverse repo and repo rates by 25 basis points each to 5.5 per cent and 6.5 per cent, respectively. Two of them said the reverse repo rate would remain unchanged but the repo rate would be hiked to 6.75 per cent to widen the gap between the two policy rates.

The RBI sucks out excess liquidity from the system through its reverse repo window and infuses liquidity through its repo window.

Four respondents felt that there would be a hike in the bank interest rate and two of them were in favour of a hike in the bank rate and the repo/reverse repo rates.

Twelve respondents said there would not be any hike in rates but the RBI would make its intention public on a possible rate hike over the next quarter.

The bankers said the RBI was worried about the unrestrained rise in retail loans for purchase of homes and cars and for general purpose personal use.

They felt the RBI would increase the provisioning requirements for standard loans in these sectors, which would directly hit the bottom line.

An increase in risk weights is also possible to make lending more expensive as banks will then be required to allocate more capital for retail loans than now.

The bankers felt that the RBI could also announce measures to check lending to the real estate sector, which was among the three sensitive sectors along with the equity market and commodities.

A likely announcement is a stipulation of a cap on exposure to real estate. Currently, the RBI has a cap on exposure to the equity market linked to banks' networth.