Interest rates may increase in 12 months – RBI

If you are planning to make a big purchase on credit, it may be a good idea to do it in the next three months.

Bankers are betting that interest rates are likely to increase by about one per cent over the next one year. The Reserve Bank of India has indicated that it is concerned about inflation, which could go up further.

However, it also refrained from sending a direct signal to banks to hike rates. The Indian financial system currently has excess cash — the so called liquidity — which can push up prices as the economy recovers. RBI’s move at this point pulls out the excess liquidity from the system. However, going forward, the central bank is likely to target inflation directly by pushing up interest rates. “The CRR hike today by the RBI was a passive move,” says Abheek Barua, economist with HDFC Bank.

“A hike in rates — such as repo and reverse-repo, would be an aggressive measure,” he adds. He is expecting these rates to increase by one per cent over the next 12 months. Repo rate is the rate at which RBI lends money to banks, while reverse repo is the interest banks earn on money parked with RBI. Mr Barua expects a hike in these during the next credit policy, which will set in April. Stock markets, initially, reacted negatively but later recovered the losses. The Sensex sank nearly 100 points when the CRR hike was announced but recovered swiftly when the market realised this would not impact lending rates of liquidity for growth in the immediate future.

The RBI governor. Dr D. Subbarao, in his post third quarter monetary and credit policy 2009-10 briefing to the media, said the bankers he had met earlier on Friday morning to discuss credit policy issues informed him that this CRR hike would not put immediate pressure on lending rates.

The RBI raised its projections of GDP growth from six per cent announced in its October policy to 7.5 per cent as activity in the real sector had picked up. Dr Subbarao said even if agriculture growth is near zero the growth in industrial production and services will support the projected growth.

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