As was probably expected after the central bank?s hike in key policy rates late last month, money is quickly becoming more expensive; companies are already paying more for for short-term loans as is reflected in the spike in the yields of Commercial Paper (CP) last week. Individuals too are getting a little bit more for putting away money. Banks have been quick to up deposit rates realising that they could be in trouble if credit growth continues at the current pace of around 20% plus ? it was slightly lower when the data was last put out ? and the pace of the growth of deposits is at just 14%. Many of the banks who had said, at the time when policy rates were hiked, that it would be a while before lending rates moved up, seem to have done a quick rethink.
They?re no longer coy and have increased their benchmark prime lending rates (BPLR) fairly significantly because most customers are still being loaned money based on the BPLR. Punjab National Bank, for instance raised its BPLR by 75 basis points while State Bank and ICICI Bank have upped rates by 50 basis points. The base rate system came into effect only on July 1 and few very customers would have switched to the new system. What?s hard to understand is why some bankers say they are increasing the BPLR so as to induce borrowers to switch to the base rate.
Both are ultimately floating rates and so the cost to the borrwer depends on the demand and supply of money in the system, the bank?s cost of funds and the margins that it wants to make. So the end rate for a borrower, should not be too different, whether he?s borrowing on the basis of the base rate or the BPLR. There could be a temporary phase, when there may be a slight difference, but that should get corrected sooner rather than later.
The short point is that if money is becoming expensive because there is a shortage of liquidity, then borrowers are going to have to pay more. And clearly money is going to cost more; the Reserve Bank of India?s objective that transmission of the monetary policy, should happen quickly is playing out.
?It?s important that the signals that we send, are transmitted, which may not have happened so far because liquidity was in a surplus,? Governor Duvvuri Subbarao had observed in July. Indeed, if liquidity remains in ?deficit mode? as the central wishes, and the demand for credit remains robust as it?s expected to, going by the environement, it?s possible there could be another round of deposit hikes in the not too distant future.
Real rates remain negative even if inflation has peaked and is expected to come off; the wholesale price index for July came in at 10% compared with 10.5% in June, helped by stable commodity prices. Of course it could be revised as happened with the May number.
Nevertheless, given that we should see a good harvest, inflation ultimately should taper off to around 6% by March 2010, although the price rise in non-food manufactured products remains uncomfortably high at 6.7%. That doesn?t mean the central bank will go easy on interest rate hikes though; clearly it will continue with its calibrated exit.