MUMBAI, Dec 16: The fortnightly debt markets update of the ICICI Securities and Finance Company said banks will be forced to hike their prime lending rates unless the Reserve Bank of India rolls back the rupee support measures.Though RBI measures were aimed at increasing only the short-term interest rates, the report says that interest rates across the board have hardened by 65 to 100 basis points.

"Banks which had sharply reduced PLRs after the last credit policy with an eight per cent CRR in mind may be forced to review their decisions in light of the new developments particularly if these measures are not rolled back within a reasonable period of time," the I-Sec debt market report said.

The hike in CRR to 10 per cent has increased the reserve adjusted cost of deposits, thus bringing pressure on the margins for banks, the report said.

The report also says the RBI measures to reign in speculation in the currency market have "failed to have the desired impact and has adversely affected the interest rate markets.

The Reserve Bank imposed a set of measures to calm the volatile currency market in the last week of November and first week of December. These included hiking the interest rate on export credit beyond 90 days and upto 180 days from 13 per cent to 15 per cent, introduction of daily fixed repos with rates steadily increased from 4.5 per cent to 7 per cent, banning re-booking of cancelled forwards for corporates and the roll back on the CRR cut announced in the October credit policy.

The report says the market reaction to the RBI measures were not in congruence with the RBI's stated intention of raising in the short term interest rates. "Alteration of cash reserve ratio affects the entire interest rate structure in the banking system.

The 0.5 per cent hike in CRR has increased the cost of deposits for banks and margins are certainly put under pressure. Banks, when sharply reducing PLRs after the credit policy, had factored in a two per cent CRR cut to 8 per cent, and with this put in abeyance as well as the likely rise in short term deposit rates, there will be an upward pressure on banks' PLRs," the report said.

The report also cast doubt on the efficacy of the present rise in short term interest rates to prevent the arbitrage available between the domestic and overseas financial markets.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.