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Puzzled banks seek RBI help

Mumbai, Oct. 4: Bankers today urged the Reserve Bank of India to remedy a peculiar situation: there’s money sloshing around in the financial system, but interest rates show no signs of coming off their perch.

At a pre-monetary policy meeting convened by the central bank, senior bankers such as State Bank of India chairman .P. Bhatt told Reserve Bank governor Y.V. Reddy that interest rates were not coming down even though credit growth had been muted when compared with last year’s level.

Although they didn’t come out with specific demands, the bankers indicated that they wanted the RBI to trim key rates when Reddy announces the mid-term review of the monetary policy for 2007 on October 30.

Liquidity in the banking system has been very high because of the huge inflows coming from foreign institutional investors. These inflows have led to the rupee strengthening, prompting the RBI to intervene in the forex markets. But, the intervention leads to an injection of rupees into the system.

Tepid credit growth, which has fallen to around 23 per cent from a high of over 30 per cent last year, has also contributed to surplus cash in the system. Banks continue to offer high deposit rates, which impact their margins.

Emerging from the meeting, Bhatt told reporters that there was some discussion on the seeming paradox of high liquidity and firm interest rates.

He said there were no indications yet that deposit rates would come down in the near term. “Credit growth is still flat since March-end this year…there is a margin pressure,” the SBI chairman said.

The meeting comes at a time when a section of the market believes that Reddy may choose to raise the cash reserve ratio (CRR) later this month to drain out the surplus cash. The CRR, which is now at 7 per cent, is that portion of banks’ deposits which must be compulsorily maintained with the central bank.

“There is the market stabilisation scheme (MSS) where the limit has nearly been reached. As the MSS comes at a cost to the fiscal exchequer, the RBI which believes in more equitable distribution of the burden, may raise the CRR by 50 basis points,” says Rupa Rege Nitsure, chief economist at Bank of Baroda.

Bhatt did not rule out the possibility of banks passing on to borrowers some of the cost burden arising from a CRR hike.

Meanwhile, the rupee today ended at a new nine and half year high of 39.50 against the dollar, stronger by 8.50 paise from previous close of 39.58 on the back of consistent inflows and in the absence of any major dollar demand.

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