Verma allays industry fears on interest rates
OUR BANKING BUREAU
MUMBAI, January 18: The Reserve Bank of India's decision to step up the bank rate and cash reserve ratio (CRR) will not queer the pitch for corporates, according to bankers and institutional heads. Their refrain is that the hike in lending rates will be a short-term move and will in no way impair growth."Corporates have nothing to worry (about). The hike in lending rates will be for the short term," State Bank of India chairman MS Verma said.The city-based TimesBank has taken the lead in hiking its prime lending rate by two percentage points (200 basis points) from 14 per cent to 16 per cent. State Bank of India is expected to lead the pack of state-run banks by raising its prime rate on Monday. It is likely to raise its lending rate by a percentage point to 14 per cent for working capital loans and to 13.75 per cent for medium-term loans. Officials of IDBI are also meeting on Monday to consider a possible hike in lending rates. At present, IDBI's medium-term rate is pegged at 12.5 per cent, while its
long-term rate at 13.5 per cent. Among the term-lending institutions, ICICI's short-term rate is pegged at the lowest at 12 per cent. Its medium-term rate is 12.25 per cent, while the long-term rate is 13.50 per cent. Both IDBI and IFCI have a two-tier lending structure -- a 12.5 per cent medium-term rate and a 13.5 per cent long-term rate. Bankers feel that the hike in lending rates will not stymie the growth in credit offtake. In the last two fortnights, the non-food credit growth of commerical banks has overshot the growth in deposits. State Bank witnessed a sudden spurt in credit offtake in December. "We disbursed about Rs 1,000 crore in December. The growth in deposits has been somewhat sluggish over the past few fortnights. We will have to raise both the lending as well as deposit rates," Verma said. Senior bankers feel the Reserve Bank was left with no choice but to tighten money supply and jack up interest rates. "The fall of rupee can largely be attributed to the nervousness. Exporters have
been holding on their dollar remittances, while importers are booking forwards even if they do not need them right now. The free fall of the rupee can be arrested if this is changed," another public-sector bank chairman said. According to Verma, interest rates on all money-market instruments like commercial paper, bonds and debentures will go up following the RBI measures. However, the high interest rate regime will be short-lived, and corporates will not have to bear the brunt for long. "I think the impact will be primarily on the short-term rates. And the scene will change in the next few months," he said. Market-watchers feel the RBI measures were largely prompted by the south-east Asian currency crisis, and the central bank has taken the "extreme steps" to avoid further fall of the rupee. "As of now, the exchange rate is reasonable. However, once the psychological barrier of 40 (against the dollar) is breached, the Indian unit can reach 45 if the central bank keeps quiet," sources close to the ReserveBank said. The rupee gained by 40 paise and closed at 39.80 in kerb deals on Friday after the central bank announced its measures. "It will gain further strength," the chief dealer of a European bank said. Overnight call rates zoomed to a record 140 per cent on Saturday in a thin market. "Call rates will come down and settle around 15 per cent. The rates will not dip to 8 to 10 per cent as the Reserve Bank has jacked up the fixed-rate repos to 9 per cent," a money-market dealer said.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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