RBI unlikely to bite rate hike bullet, feel bankers

The banking community feels that the Reserve Bank of India may not raise the key signal rates in the quarterly review of the monetary policy to be announced on Tuesday.

"Inflationary pressures have eased and lending has already gone up owing to tightness in liquidity. There is no justification of a rate hike at this juncture," said a senior banker on conditions of anonymity.

Enthused by RBI Governor Yaga Venugopal Reddy's promise to provide "appropriate liquidity to meet genuine credit needs", some bankers are even expecting a cut in the cash reserve ratio (CRR). The CRR is now pegged at 5 per cent and the floor for CRR is 3 per cent.

But some bankers hold a different opinion. "All signals are indicating a tightness in policy. Even if the RBI leaves the rates unchanged now, it will revisit the issue in April. It cannot possibly follow a soft monetary policy now when the shadow of demand-driven inflation is looming large on the horizon," said another banker.

The inflation rate eased to 4.24 per cent for the week ended January 7, below the central bank's target of 5.0-5.5 per cent.

Most bankers expect the RBI to take a call on the interest rate in its April policy as a clear picture will emerge on the trajectory of the US interest rates by that time. Besides, the Indian government would also have presented its annual budget for fiscal year 2006-07.

Finance Minister P Chidambaram had in his last meeting with public sector bank CEOs made a pitch for keeping interest rates on funds lent for productive purposes unchanged till the end of the current fiscal year in March.

Bankers also expect the RBI to come out with a definite plan for banks tier III capital in its quarterly review.

The central bank has been working on the scheme even as some public sector banks may face capital scarcity as they are reaching the threshold limit for the government's stake in banks. Since, the government stake cannot come down below 51 per cent, they will not be able to access the capital market.

The central bank is also expected to come down heavily on banks' failure to adhere to the know your customer norms and involvement in the initial public offer scam.