The banking sector is at a cross-road. The stability on the interest rate front and inflation, for all practical purposes, could become a thing of the past soon. For millions of savers and borrowers, the next few weeks would be important. Reserve Bank of India Governor Yaga Vengupoal Reddy who is scheduled to announce his half-yearly credit policy next week, is expected to give indications on the interest rates and inflation. As the Indian economy is now interlinked with the global economy, signals from outside indicate a rise in interest and inflation levels. The US Federal Reserve is talking about rate hike these days. It may be time for savers, borrowers, investors and corporate honchos to rework their strategies. A major push for a different approach is expected as the NDA government has been voted out and the Congress-led combine has come to the power with Left parties. For Reddy, it may be early days to make major changes in line with the new ruler needs. What’s on the anvil?• Interest rates. The RBI may not increase the bank rate or cash reserve ratio this time. But Reddy may follow the footsteps of US Fed chief Alan Greenspan and warn of a possible rise in interest rates in the near future. Some bankers have already hinted at the bottoming out of the interest rates. The rate rise may take off with the housing loan segment. We’ve have been warning readers about this for sometime now. • Inflation. This could be a major worry for everybody and elections are won and lost on this factor alone. Crude oil prices are at 13-year high, pushing up all other prices in a domino like effect. As the government did not want to antagonise voters, inflation rate remained below 5 per cent in the last few months. Now that the elections are over, be prepared for price hikes and a rise in inflation levels. Reddy may have a tough time ahead in managing this. • Investments. Several scenarios are possible. Don't expect big steps on the investment segment, especially more sops for foreign investments. Unlike the NDA, a Congress-led Government is unlikely to give a greater role for foreign investors (who have put $ 27 bn in Indian stocks). Reddy may wait for the next credit policy to make more changes as the policies of the new ruling combine are yet to be known. • Forex management. The rupee’s upward march may stop for some time. Foreign investors may take a breather. Reddy has little room as the rupee is linked with inflation, interest rate and foreign inflows. • Structural changes. Reddy may end up with making small structural changes in the banking system, if at all, till he gets firm signals from the new government in New Delhi.
