The Hindu Business Line : Banks have to rejig rates

However, the RBI will have the onerous task of managing the continued inflow of capital without affecting liquidity and growth, while ensuring financial stability.

Inflationary expectations are equally or more relevant to the regulator than inflation itself.

The average price of crude has already increased and is expected to rise further. Coupled with this, M{-3} has also shown a sharp increase. Hence, the regulator is reasonable in anticipating an inflation level of around 5 per cent. With liquidity available in the banking system, banks are faced with three options to protect their spreads:

i) increasing lending rates; ii) reducing deposit rates; and iii) adopting austerity measures.

A combination of the three will have to be chosen by individual banks depending on their deposit level, CD ratio and spread.

As regards increasing lending rates, the opportunities are thin, as borrowers are already resisting the high rates and this is evidenced by the poor growth of credit during the first half of the current fiscal.

Lowering deposit rates is a distinct possibility. But this may impact deposit inflows into the banking system, as investors may return to post offices or take the mutual funds route. Austerity measures may play only a limited role.

Each bank will have to do its own homework to decide on the appropriate response to the Mid-Term Policy.

(The author is Chairman, Karur Vysya Bank.)

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