All eyes on credit policy

MUMBAI: Investors are expected to look for clues in the upcoming monetary and credit policy to be announced by RBI on Wednesday. If the central bank decides to hike short-term interest rates in a bid to rein in inflation and credit take, you can expect bank stocks to be at the receiving end of investors��� ire.

Expectations are that the central bank would hike the repo and reverse repo rates by 25 basis points each to 7.50% and 6.25%, respectively. Repo rate is the rate at which banks borrow funds from the RBI, while at reverse repo rate, they park excess funds with the central bank. The expectation of a rate hike was primarily triggered by the fact that the inflation rate crossed the psychological level of 6%. It is also felt that the RBI would stem the scorching pace of credit growth.

While bank credit has grown at an annual rate of 30%, deposit growth rate has just been 20%. ���It is clear that RBI wants to flush out excess liquidity from the system. So, rate hikes would not be a surprise, which will also mean that banks will not have cheaper access to funds too (hike in repo rates),��� said a banking analyst with a brokerage.

Last month, RBI increased the cash reserve ratio (CRR), the minimum amount that commercial banks must keep with the central bank as cash reserves, by 50bps (0.5%) to 5.5% to mop up money from the banking system. This step has drained out Rs 13,500 crore from the banking system and pushed up rates further.

Analysts feel RBI may also hike banks��� provisioning requirements for real estate and stock markets to restrict lending to these segments, as part of its attempts to prevent overheating there. Market players do not expect major surprises from the remaining companies that will detail earnings next week, with most of the positives already factored in. Key earnings announcements next week include ONGC, Tata Steel, ITC and Tata Tea among others.