Interest rates may go up, corporates worried

Interest rates may go up, corporates worried
ENS ECONOMIC BUREAU

Mumbai, July 21: While banks and financial institutions are unlikely to hike their interest rates over night, the Reserve Bank's tough measures are expected to push up interest rates. The hike in bank rate and cash reserve ratio has left Corporate India wondering whether it signals a high interest rate regime. While many are unperturbed that this will not have an impact on the credit flow, the move has rung a warning bell to borrowers.

The Industrial Development Bank of India (IDBI) would be convening a board meeting, to take a decision on its lending rates in response to the hike in bank rate and cash reserve ratio (CRR). ICICI Ltd's senior general manager Kalpana Morparia suspected today's measures as a response to curb speculation in the forex market while adding that "ICICI is pretty much neutral to today's moves by the Reserve Bank." Morporia, while stating that a hike in interest will only benefit the institution's lending portfolio, made it clear that it will contemplate a hike in its interest rates only after studying the impact on the markets.

Said IndusInd Bank's managing director and CEO, KR Maheshwari: "The measures taken by RBI should be temporary as a substantial part of the government borrowings -- 60 per cent -- have yet to be completed. The government may revise these rates by the end of August or by the beginning of September. If money market conditions remain tight, it would affect the trading in government papers as an increase in interest rates would decrease the volume of trades".

IndusInd Bank, which was planning to lower the prime lending rate to 14 per cent from 15 per cent has now shelved the decision. "The bank will not, however increase its lending rates," Maheshwari said.

According to IDBI Bank's treasury head and senior vice president, S Anand, "the market has been caught by surprise. RBI Governor, Bimal Jalam, had even last week said that the rupee would be stable and the sudden change in stance has confused the market. Government borrowings of 60 per cent are still to be completed. The market conditions may tighten as there is a reduction of 50 per cent on collaterised refinance limits. There could be some impact on the industries like steel that were showing signs of recovery".

Others like UTI Bank's chairman and managing director, PJ Nayak noted that "the feeling in thew market is that the steps taken by the RBI is temporary. The bank will however not increase its lending rate". A senior executive of a state-run bank felt that the RBI intervened basically because of the developments in the forex market when the rupee broke the Rs 45 mark against the dollar.

Said Gujarat Ambuja Cements whole-time director Anil Singhvi: ``The RBI decision to hike the bank rate and cash reserve ratio (CRR) will not have much impact on credit flow to corporates. Since there is enough liquidity, I do not see the possibility of interest rates moving up as a result.''

According to ACC president (finance) NH Italia, the RBI decision may have an adverse impact on the cost of funds as there are fears about a possible hike in the interest rates in the short-term. ``As an exporter, we were happy with the falling rupee and we now expect banks to hike PLR shortly. So, to that extent, interest cost for corporates will go up,'' Sun Pharmaceutical vice president (finance) and company secretary R K Baheti.

Said Marico Industries chief financial officer Milind Sarwate: ``The move to raise bank rate and CRR goes against the grain of the government. It shows that the government is not necessarily going to let interest rates fall. Interest rates had bottomed out of lately. There was a feeling among the corporates that the government was holding on to the interest rates. However, a 0.5 per cent hike in CRR is not going to lead to any major liquidity crunch.''