Interest rates set to rise further

However, RBI has retained other benchmark rates like the bank rate 6 per cent, reverse repo rate 6 per cent and cash reserve ratio 5.5 per cent in its third quarterly review of the monetary policy for 2006-07.

Taking a cue, banks have already started hiking the interest rates with private sector Yes Bank announcing a 0.5 per cent hike in benchmark prime lending rate within hours after the RBI policy announcement. 8220;The RBI measures are well-balanced and not as worrisome as expected. Clearly, the need to curb inflation and ensure price stability were on top of the RBI8217;s agenda,8221; said Rana Kapoor, Yes Bank8217;s managing director and CEO.

RBI8217;s new provisioning norms will make loans to real estate builders, credit card holders and capital market costlier. However, housing loan sector has been excluded from the higher provisioning requirements. Interest rates have been rising in the last one year with one-year term deposit rate rising as much as three percentage points. 8220;The hike in repo rate will eventually raise the cost of borrowings with interest rates slightly moving upward,8221; Videocon chairman Venugopal Dhoot said.

While announcing the new measures, RBI governor Y.V. Reddy made it clear that inflation is the main concern of the central bank. 8220;Inflation needs to be brought down as close as possible to 5-5.5 per cent at the earliest while continuing to pursue the medium-term goal of a ceiling on inflation at 5 per cent,8221; Reddy said.

He made it clear that the RBI would 8220;respond swiftly with all possible measures as appropriate to the evolving and domestic situation impinging on inflation expectations and the growth momentum. The RBI had raised CRR 8212; the portion of deposits to be kept with the RBI 8212; by 50 basis points to 5.50 per cent last month to suck out liquidity from the banking system.

According to Reddy, RBI8217;s plan is 8220;to reinforce the emphasis on price stability and well anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to sustain the growth momentum.8221; Another stance of the policy will be to re-emphasise credit quality and orderly conditions in the financial markets.

BANKERSPEAK

Haseeb Drabu, chairman
Jammu 038; Kashmir Bank

8220;The season for hikes seems to be over. The end to hikes is warranted now because from here on, what the system requires is not a directional change 8211; from high liquidity to tighter liquidity or in pricing of credit. Instead the need to ensure allocative changes in credit. This can be achieved only through sectoral measures.8221;

Gautam Vir, MD and CEO
Development Credit Bank

8220;The RBI has done a great job in balancing all factors, and striking a good midway between controlling inflation, and making sure that the Indian economy continues to grow rapidly. A 25 basis points hike in repo rates was less than the worst fears of the market, and is more a signal of rising costs for the banking industry, than necessarily squeezing credit to industry.8221;

M.B.N. Rao, CMD
Canara Bank

8220;The slight tightening visible presently is only to prevent credit flowing into unproductive sectors and speculative activities.8221;

Mohan Shenoy, treasurer
Kotak Mahindra Bank

8220;The increase in provisioning requirement from 1 to 2 per cent is very steep. It would discourage banks from lending in those particular sectors.8221;

Reddy8217;s inflation prescription

8226; Hike in repo rate by 25 basis points to 7.5

8226; Provisioning for credit card, realty, market loans doubled to 2

8226; Provisioning for bank loans to NBFCs raised

8226; More steps likely if situation warrants

8226; Focus on price stability and credit quality