With the Centre revising the outstanding limit in government securities borrowings under market stabilisation scheme (MSS) to Rs 2 lakh crore from Rs 1.5 lakh crore, bankers now anticipate interest rates in the near term to firm up by 25 to 40 bps, while the long-term view is static.
However, they have not altogether ruled out a hike in the cash reserve ratio (CRR) as well.
The view on interest rates, they said, was largely due to the increased flows of government paper in the market that banks would like to invest in, since credit offtake has been poor.
Bankers don’t see a cause for lowering prime lending rates even though there is a credit slowdown. But most bankers said they would look at reducing floating rates on housing, followed by car and personal loans.
“MSS will have no direct impact on bank lending rates. But the era is that of festive discounts,” B Sambamurthy, chairman and managing director of Corporation Bank, said. MSS is another tool used by the Reserve Bank of India (RBI) to drain out excess liquidity. Another fact that could deter lending rates from softening is the fear that inflation could rise from the present 3.4% levels. A section of the industry felt that inflation could zoom to 6% levels in about two months’ time, thereby ruling out any softening trend for the time being. This, they argued, was largely due to the combined base effect and soaring liquidity in the money market.
They felt that the RBI would hence be compelled to hike the cash reserve ratio (CRR) of banks by at least 50 basis points. CRR, which is the cash banks maintain with the RBI as a percentage of net deposits, is currently at 7%.
Bankers said that since MSS is a long-drawn procedure, hence an immediate tool to have the desired impact was to sterlise the rupee through a CRR hike, which at one go could take away Rs 16,000 crore to Rs 17,000 crore. Bankers are, hence, anticipating a CRR hike as well.
