The Hindu Business Line : Public sector banks may decide on interest rate cut soon

Mumbai, Jan. 6 Following the Finance Minister, Mr P. Chidambaram’s appeal to banks to reduce deposit and lending rates by 0.5 percentage points, the asset liability management committees of most public sector banks are likely to meet soon to take a decision on this..

At the quarterly performance review meeting with chief executives of public sector banks on Friday, the Finance Minister asked them to reduce interest rates in order to encourage investment and consumption to boost economic growth.

But most bankers feel that there is no great scope for reducing rates immediately, given the likelihood of a hike in domestic fuel prices and with inflation still tending towards the higher side.

“Even if oil prices are increased by Rs 2, it will push up inflation. So, there is no case for reducing rates immediately,” said a senior official from a public sector bank.

With regard to lending rates, bankers said that corporates are already getting rates at a discount to the prime lending rates.

So, reducing rates further will not be an easy option.

“As it is close to the year end, most companies may have already exhausted their expenditure budgets for this year, and may not want to spend more,” said another bank official.

At the meeting with bankers, the Finance Minister expressed concern that as the RBI had maintained a status quo with regard to rates in the last monetary policy, there was no reason for banks to raise rates, and a reduction in interest rates would help the system in general, said a bank official.

SBI hikes rates

The country’s largest bank, State Bank of India, increased its term deposit rates on Thursday, which the Finance Minister feared would be taken as cue by other banks to increase rates.

According to a banking analyst, it may be difficult for banks to cut rates, as long as the RBI continues to charge 7.75 per cent for reverse repo.

“It may not be sustainable for banks to cut interest rate, as rates in the short term are very high. “There is also reason to believe that there is shortage of liquidity in the system,” he said.