Rate hike not to come in way of growth: Finmin

NEW DELHI: The finance ministry has assessed that credit growth will not be hit, and that the Indian economy would grow 8.2% this fiscal, even if the RBI goes through with a hike in some key interest rates next Tuesday, when the central bank governor is scheduled to announce the next quarterly review of the monetary policy.

New Delhi is resigned to the prospect of the apex bank raising rates, going by a background note prepared for Friday’s meeting of finance minister P Chidambaram with the public sector banks. “Any hike in the interest rate may not affect corporate lending,” says the note.

The optimistic scenario painted by the ministry says there has been no change in the macro-economic fundamentals of the global economy since “the policy rates in India were increased hours after the European Central Bank hiked its key rate” on June 8.

It has also factored in a GDP growth rate of 8.2% for this fiscal, despite rising international oil prices. Coming out of the three hour-long meeting, Mr Chidambaram told reporters: “Interest rates could moderate if inflationary expectations are dampened.” “There is ample liquidity in the market, but interest rates are rising due to inflationary expectations,” he added.

The minister explained that he believed a soft rate of interest “will be good for everybody. For every borrower, it is good to have moderate interest rates,” he said.

Bankers told the minister that they expected robust growth in their portfolio, even if another interest rate hike came through. The minister also said there was “some uncertainty” over inflation, but he hoped it would get resolved “in the next few days and weeks”.

The ministry stand has given enough room for YV Reddy to raise rates next week at the quarterly review of the monetary policy. However, the US Fed chairman Ben Bernanke’s recent pronouncement that the worst was over on the inflation front suggesting that the Fed no longer felt pressured to keep raising policy rates, has a bearing on the RBI’s own policymaking.

Further, recent trends in domestic inflation too suggest that the rate of inflation will not exceed 5.5% by the end of the year. Bankers toed the rate hike line, attributing their rate hike expectations to surging oil prices and their own credit commitments, given that the impending busy season is ahead.

“The busy season is yet to pick up. We are witnessing credit growth in excess of 30%. Besides, oil prices are still surging. We expect the RBI to hike rates by 25 basis points to 6%,” a top official of a public sector bank said.

“I expect RBI to raise repo and reverse repo rates by 25 basis points during the credit policy review on July 25,” said KN Prithviraj, chairman, Oriental Bank of Commerce. “With the cost of funds increasing, the margins of the banks are under pressure,” he said, adding that the bank will review lending rates after the RBI policy review.

The government has noted that while banks have been trying to shore up their deposit base — growing at an average 12.93% this year — they have hiked the rates in housing loan portfolios without altering their Prime Lending rates (PLR). “This will squeeze the Net Interest Margin (NIM) in the long run,” the government said. It would imply that the banks will increase rates shortly to avoid narrowing their NIMs.