Mumbai: Indian lenders have suggested to the Reserve Bank of India (RBI) to pause its rate hike cycle and also urged for a forward looking statement on interest rates at the policy review next week, said Indian Banks’ Association (IBA) chief executive K. Ramakrishnan on Monday.
Select bankers led by the bankers’ body met RBI deputy governor Subir Gokarn at a meeting to give their views on interest rates, credit and deposit growth, economic growth, bad loans and other macro-economic parameters ahead of the first-quarter policy review due on 26 July.
“Bankers told the RBI they want the central bank to give a clear forward statement on interest rates so that the industry can take a decision,” said Ramakrishnan.
Bank of Baroda chairman and managing director M.D. Mallya said that high interest rates could be a reason for the slowdown in credit growth.
The RBI, one of the most aggressive central banks globally, has raised rates 10 times so far since March 2010 to combat sticky inflation. In May, it surprised the market with a larger-than-expected 50 basis points increase and is widely expected to raise rates by 25 basis points again on 26 July.
The central bank is trying to maintain a tough balancing act as it tries to keep growth humming in the world’s second fastest growing economy and at the same time tame near double-digit inflation.
A Reuters poll expects the central bank’s key lending, or repo rate, to peak at 8% by December.
India’s wholesale price index (WPI) based inflation rose 9.44% in June from a year earlier, outpacing May’s 9.06% increase, data released last week showed.
Banks have already raised lending rates 100-175 basis points in response to the RBI’s previous rate hikes and are worried that further rate hikes could hurt credit pick-up.
“New projects are not coming in and there is a slowdown in credit demand and off take,” Mallya told reporters after the meeting, adding loans to small and medium enterprises could turn bad.
Bankers also told RBI that bulk deposit accretion is faster than that in retail deposits, which will further raise cost of borrowing.
Loan growth stood at 3.7% in the current financial year to 1 July, lower than 5% in the same period in the last fiscal year.
Net interest margins of banks could also slip after banks raised term deposit rates in the past two quarters, according to brokerage Sharekhan, which has a neutral view on the sector.