State Bank of India chairman O P Bhatt said on Friday that the widely anticipated hike in the cash reserve ratio (CRR) would not affect interest rates, which are likely to remain stable for the next six months.
CRR is the proportion of deposits that commercial banks have to park with the Reserve Bank of India, on which they get no return. Bhatt said the ''overhang'' in liquidity would ensure that a hike in CRR would not result in higher interest rates.
Bhatt said, ''All banks are looking forward to more economic activity. Credit growth has not happened in a significant manner in the past 12 months or more. Because of the high liquidity overhang, my view is that regardless of what RBI does, rates will remain stable till June.''
Talking to reporters in Mumbai at a curtain-raiser for the Indian Banking Conclave, which will be jointly hosted next week by SBI and the Indian Banks Association, Bhatt also said SBI is likely to float a retail bond issue of a small size. ''We do not require the capital - it is only to test the water,'' he said.
On the same occasion, Bank of Baroda chairman M D Mallya agreed that interest rates would remain stable in the near future since there was substantial liquidity in the system.
Bhatt further said it is still unclear whether the current growth in small credit is due to the government's economic stimulus packages or the Sixth Pay Commission award to government employees, or debt relief measures for the rural poor, or stability in economic activity. ''It's too early to say whether the revival in the economic activity is sustainable. Credit offtake is yet to pick up speed and momentum,'' he said.
''So if you look at all these factors, till June, interest rates on credit are not going to go up and the evidence is in the fact that some banks are even cutting rates on auto loans. So where is the question of raising rates,'' he asked.
He further said the best banks could hope this year is credit growth of 16 per cent, against RBI's projection of 18 per cent.