Bankers are now almost certain that the Reserve Bank of India will hike cash reserve ratio (CRR) by 25-50 basis points when it announces its annual monetary policy and review on April 29. But even more worried are government banks that recently cut prime lending rates between 25 and 50 basis points on government diktat.
Canara Bank, which had cut lending rates last month, now is cautious when asked whether the bank would hike rates. “We cannot take any immediate action. Rather, we’ll wait for some more time to see what measures are initiated by the RBI or the government to contain inflation,” said MBN Rao, the bank’s chairman & managing director.
IDBI Bank was one of the banks that announced a reduction of 50 bps on its prime-lending rate but withdrew the offer once it sensed that inflation levels were threatening to go out of control.
RK Bansal, chief financial officer of IDBI Bank now says: “We’ll wait until the RBI’s annual monetary policy announcement is out before taking any decision”. The proposed PLR-cut by the bank was supposed to come into effect since April 1.
Treasury heads say that the RBI will be left with hardly any choice than to control money supply and usurp excess liquidity from the system through an aggressive MSS route (market stabilization scheme).
Dinesh Shukla, banking analyst with Religare Securities Ltd, strongly believes that signals of a rising rate scenario and a strong case for CRR hike looks possible. “Such scenario will result in marked-to-market losses on investment portfolio of banks. The probability of MTM losses is high as credit growth has moderated to 22% in FY08, compelling banks to invest in government securities.”
Ten- year benchmark rate crossed the eight-per cent mark on Friday to close at 8.04%.
“We believe that short term concerns like upward movement of market yield, deterioration of in credit quality, and moderation in credit off take would impact valuations for the banking sector,” Shukla said.
With headline inflation on the rise at 7.41%, bank depositors are also facing the dual risk of reducing returns and a negative returns if inflation continues its surge. Banks that till recently were on a reduction drive of prime rates and mortgage home loan rates have now begun to rethink under the new scenario.