The Hindu Business Line : `Rate hike on the cards'

This would pave the way for higher interest rates in the economy, top-level bankers said. Reverse repo is the sale of securities by , usually the government, with an agreement to buy back at a predetermined period and price. This is the mechanism the RBI uses to mop up surplus liquidity in the markets.

The RBI's direct lending rate to banks, the Bank Rate, is also expected to be hiked. In addition liquidity support is also provided through repurchase operations, purchase of Government securities from the banks. Currently, the reverse repurchase rate is 5 per cent and the Bank Rate is 6 per cent.

Bankers said the hikes in both these rates could be anywhere between 0.25 and 0.5 per centage point. Hints of a hike were already evident from the high cut-off yields at the reverse repo rates. At Wednesday's auctions, of 91-Treasury bills, the yields were 5.53 per cent. This is the highest level this financial year. The last time the 91-day T-bill yield reached this level was in November 2004 when the cut-off yields were 5.57 per cent. Similarly, the 182-day T-bill yield was fixed at 5.78 per cent, close to the Bank Rate.

Anticipations of a rate hike have already resulted in some of the life insurers deferring purchases of long-term Government securities in the markets. As a result, the 10-year yield-to-maturity is now at 7.24 per cent. The anticipation was despite the fact that the markets continue to be awash with liquidity evident from the high mop-ups through daily repos. The RBI mopped up about Rs 15,605 crore on Wednesday and another Rs 17,220 crore the next day.

Bankers said expectations of a hike were also driven by concerns over high credit growth and the consequent impact on liquidity during the peak season. Credit, powered by offtake of non-food credit, has been growing at upwards of 30 per cent on a year-on-year basis. Besides, the demand for foreign currency by oil companies for crude and liquid petroleum gas imports and exit by foreign institutional investors (FII) were also expected to lead to a tightening of liquidity.

The large accretions to foreign exchange reserves from the FII inflows had helped expand domestic liquidity. This has now stopped. An exit by FIIs without an concomitant inflows has the opposite effect — tightening of liquidity. But the bankers said that there were aggressive interventions by the RBI as in the past, when inflows had provoked sterilisation operations - mopping up of foreign currency and simultaneously reverse repos.

Bankers said the RBI signals would pave the way for higher deposit rates and higher lending rates. Lending rates would not,however, translate into a hike in the prime lending rates. The discounts to PLRs would, however, substantially reduce, they added. Some of the top corporates were currently raising funds at 300 basis points below the PLR that currently ranges between 10.25 per cent and 10.75 per cent.

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