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Signs of hyperinflation - Indian economic growth in serious trouble - Indian interest rates to rise on strong credit demand, higher inflation: bank officials
Strong demand for credit and rising inflation are likely to push up Indian interest rates, an increase that would hurt millions of middle class consumers currently in a buying frenzy because of the low cost of credit, officials said Monday.
India's central bank, The Reserve Bank of India, will unveil its quarterly monetary policy Tuesday.
The expectations that the U.S. Federal Reserve would continue to raise rates as the U.S. economy struggles with rising fuel costs _ aggravated by Hurricane Katrina _ also was a factor guiding Indian bankers.
"The RBI is likely to hike short term reverse repo rates to 5.25 percent from 5 percent," said G.V. Nageswara Rao, who heads commercial banking at IDBI Bank. The reverse repo rate is the rate at which the central bank borrows from commercial banks.
India's banks have progressively cut lending rates since 2000, helping companies reduce their borrowing costs and improve profits. Softening interest rates have also fueled a housing and consumer-product boom in the country.
But the trend has reversed lately, primarily because of high oil prices and the impact on inflation. Several banks raised their rates earlier this year and another round of hikes appears imminent.
"High oil prices and (the) tightening rate cycle in most economies is leading to rate hikes around the region," said Suresh C. Soni, a director at the Deutsche Asset Management Company. "Most central banks in Asia are raising rates to catch up with rising U.S. rates and to control oil price-led inflation."
A strong demand for credit, which increased 11 percent in the first six months of this fiscal year, was pressuring interest rates despite adequate liquidity in the banking system.
Interest rates are also likely to be pressured by more-than-expected borrowing by the government this year, according to international rating agency Standard & Poor's.
BIZ/FINANCE ARTICLES
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