Interest rates have peaked amid tight liquidity
By Vaibhav Aggarwal
Oct 7, 2008
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In the wake of tight liquidity conditions and stable inflation rate, lending rates in the country seem to have peaked.

State Bank of India Chairman O P Bhatt said: "Liquidity is tight and inflation is expected to hover around the current levels, if not come down. Considering these two factors, I think the lending rates set by the Reserve Bank of India have peaked."

However he said that the interest rate charged by the banks will differ depending on various business considerations. He somehow expects the liquidity crunch to ease because the government will infuse funds in the system to pay for pay hikes as per the Sixth Pay Commission recommendations.

"Else the RBI could intervene. They have a number of measures to ease liquidity. We do not know which one of these measures they will employ when the need comes," he said.

The SBI chief, however, did admit that there is liquidity problem as the short term-interest rates are rising and repo borrowing in high.

Bhatt also confirmed that SBI has no plans to expand overseas, even if the financial crisis in US may seem a handsome opportunity for the Indian banks to expand their business in the western markets. He says, "Many people are saying so. But a sudden expansion in those markets could be risky."

The outlook for interest rates is becoming clearer as having peaked. The rates are not expected to decline much as inflation moderates and liquidity is tight.

"For the moment, the liquidity situation is definitely tight. There is no doubt about it. Inflation has come down at least a little bit. It is unlikely, it will go up very much higher. It may not go down very much. In this scenario, it is difficult for me to imagine that RBI will hike interest rates," said Mr Bhatt.

The Reserve Bank is expected to keep benchmark interest rates unchanged in the forthcoming credit policy review later this month.

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