The Reserve Bank of India (RBI) may be forced to tighten rates to contain price rise that is accelerating beyond expectations thus pushing the borrowing costs even higher. And RBI is likely to continue with tight liquidity stand to ensure efficient transmission of monetary policy.
Bankers and economists believe rates may rise by another 50-100 basis points in 2011 as demand for loans surges in an economy expanding at near 9% and liquidity remains tight reflected in record bank borrowings from RBI. RBI data show credit grew 23.7%, surpassing the central bank’s target of 20% for the fiscal. Deposit growth slowed at 14.7%, reflecting investors’ preference for higher-yielding assets due to soaring inflation.
ICICI Bank, SBI, HDFC and many other banks have raised lending rates, indicating higher cost of borrowing for individuals, farmers and corporate; which will continue to rise. Also inflation, after showing temporary signs of cooling for a few months, is increasing at a faster pace.
KR Kamath, CMD of Punjab National Bank said, “So long as there is pressure on liquidity, pressure on margins will continue. Also, there will be resistance among borrowers to absorb a hike in lending rates, but if deposits do not grow in turn with credit growth, banks will need to attract depositors by offering higher rates keeping inflation in mind.”
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