Inflation may adversely impact banks
By Neelima Shankar
Dec 16, 2009
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The inflation rose to 4.78 percent for November as compared with 1.34 percent in September 2009. This is primarily due to increase in prices of food commodities.

Inflation coupled with strong industrial production indicates RBI's gradual exit from the accommodative policy.

However, the regulator is also concerned over the impact of pre mature exit that might hamper growth in economic activity. Therefore, the timing and extent of the tightening are important for gauging the impact on interest-rate sensitive sectors such as banks, real estate, cement and auto.

Most analysts are of the opinion that RBI would not take any dramatic step due to slow credit off-take (10 per cent as of November 2009 and 5 per cent year-to-date).

The surge in inflation rate is mainly attributed to supply-side factors and therefore the impact of changes in monetary policy would be minimal. While a 50-basis-point cash reserve ratio (CRR) rise is imminent, interest rates will not be increased soon. Monetary tightening will reduce liquidity and money market rates will go up.

Few banks have reduced interest rates on home loans, besides selling auto loans aggressively. Analysts expect that banks have a margin cushion due to recent repricing of fixed deposits.


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