This story is from July 27, 2005

No room for banks to raise interest rates

Priya Ranjan Dash / TNN / Jul 27, 2005, 01:36 IST

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NEW DELHI: The banks desperately wanted it, but the Reserve Bank of India did not provide them even with the slightest handle for effecting another round of lending rate hike in three months.

No room for banks to raise interest rates

NEW DELHI: The banks desperately wanted it, but the Reserve Bank of India did not provide them even with the slightest handle for effecting another round of lending rate hike in three months. FM P Chidambaram, who had denounced the rate hikes last time around by banks as a tendency of "profiteering", on Tuesday made it clear that "there is no case for any sharp adjustments in interest rates now".
Chidambaram justified the RBI decision in its first quarter monetary policy review to leave the key short-term interest rate, the reverse repo rate, unchanged at 5%."The RBI policy is in line with government's thinking," Chidambaram said.
Banks had expected RBI to respond to inflationary expectations in the economy and to increase the reverse repo rate by 25 basis point to 5.25% at the minimum so that they could use it as a trigger to raise lending rates as they had done three months ago following the RBI monetary policy for 2005-06. The reverse repo is the rate at which banks park their funds with RBI overnight.
On the contrary, RBI threw cold water on the banks' expectations, stating that inflation remains under control.

The FM said government would ensure price stability and is keeping a close watch on inflation. "Price stability is always on the radar screen. Price stability is always the priority of the government," he said.
The FM had also made RBI's monetary policy task easier by announcing that the government would keep its borrowings lower than the budgeted level of Rs 1,39,467 crore this fiscal. Chidambaram reaffirmed his commitment on this score on Tuesday. Lower government borrowings would mean less crowding out of private borrowers in the market and less pressure on interest rates.
Analysts said neither a hike in cash reserve ratio that the banks are required to maintain with RBI nor an increase in the benchmark bank rate (the rate at which RBI lends to banks) was warranted at this point of time. It is good that RBI left those unchanged.

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