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Saturday, Nov 20, 2004

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PLRs: Already on the steep side

P. Devarajan

"Interest rates could inch up further by 50 basis points or a bit more in the coming months. But that should not impact the prime lending rates of PSBs."

AMONG the senior players in the banking industry, ICICI Bank has marked up its prime lending rate while public sector banks (PSBs), including SBI, have yet to make a firm move.

"Interest rates in the financial markets could inch up further by 50 basis points or a bit more in the coming months. But that should not impact the prime lending rates of PSBs which are still ruling in the comfortable range of 10.25 per cent to 11 per cent. Sub-PLR lending may see a shrink forcing corporates to activate credit lines with banks," says the Chairman of a leading PSB.

That makes some sense as the prime lending rates are still on the steep side and even if inflation breaches the 7-8 per cent range, banks should be comfortably placed. Some see the inflation rate stuck between 7 per cent and 8 per cent and could go either way depending on international crude prices.

Over the last few months, the RBI has been able to squeeze the market dry and is cutting profitable deals with banks. Call rates have shot up to over 6 per cent. Some time ago, banks were placing loose cash with RBI against securities; now the RBI is lending cash to banks against securities.

Going by the latest data (Nov. 19), RBI has lent Rs 16,195 crore on a 3-day repo at a fixed 6 per cent; the amount outstanding on a one-day repo (6 per cent) is Rs 17, 235 crore. Currently, the RBI is earning 6 per cent while paying 3.5 per cent on the impounded CRR (cash reserve ratio) funds (Currently, CRR is at 5 per cent, of which 3 per cent does not earn any income) of banks. It does not seem fair and RBI could take a calculated risk by pulling back CRR to 4.75 per cent, contend dealers.

Some cash will flow out of the Market Stabilisation Scheme when the securities get redeemed and dollar inflows still continue. No central bank and surely not RBI is comfortable with an inflation rate of 7.76 per cent nor does it want money to tail goods.

They may like to wait on the trend in international crude quotations as none is sure whether crude prices will at least stabilise at $45 per barrel.

For many it is not a choice between inflation and growth as most of the time inflation hurts growth and cripples the poor. By enhancing liquidity in the system, banks will be tempted less to mark up the cost of funds at a time when industrial and farm demand for funds are on the rise after about three years.

Textiles, steel and automobiles are absorbing cash and corporates are talking of expansion plans (none has put the cash on the table). If need be, the RBI can push up CRR. Is it proper to squash the uptrend?

Except New Delhi none will be proud of a 6.5 per cent GDP growth when the country needs at least a 10 per cent growth to pull the poor out of poverty fast.

The US need not grow at 6.5 per cent because it does not have to nor is it feasible.

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