Mumbai: Banks on Thursday urged the Reserve Bank of India (RBI) to keep interest rates stable at its policy review later this month, saying any increase could further dent sluggish demand for loans.
The RBI is widely expected to raise the cash reserve ratio (CRR), the level of cash banks must keep with the central bank, when it finalizes policy on 29 January.
Recent strong data has raised expectations that policy rates might also be raised, with December inflation at a one-year high of 7.31%.
“We told the RBI that this is not the right time to hike rates and indicate increase in lending rates,” the chairman of a state-run bank said, after a meeting with central bank officials ahead of the policy review.
Loan growth in India fell below 10% in November despite a reduction of 300-350 basis points in lending rates since the start of 2009. Companies have been raising funds at cheaper rates from overseas.
Bankers said a pick-up in annual loan growth to 13.7% on 1 January was unlikely to be sustained as the rise was caused by bunching of disbursements ahead of the December quarter end.
“Liquidity will be in abundance up to March as credit pick up is not happening,” said M.V. Nair, head of Indian Banks’ Association that represents all commercial banks in the country.
Banks have been parking excess funds of around Rs800 billion ($17.5 billion) in the central bank’s daily reverse repo auctions, which pay 3.25% on an annual basis.
“If at all any hike in CRR is done, it should be in a small quantum,” another banker said, adding any bigger increase could choke the liquidity when demand picks up in the June quarter.
The participants in the meeting included the chiefs of State Bank of India, ICICI Bank, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India and HDFC Bank.
Bankers also suggested the RBI to reduce the interest rate on savings bank deposits from 3.5% to help lower the pressure on cost of funds when banks are required to calculate rate payment on a daily balance basis from 1 April.
Banks now pay interest on deposits based on the average amount in the last 20 days of a month, which works out to about 2.5%.