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Inflation: Interest rates to rise

June 11, 2008 11:29 IST
Housing Development Finance Corporation (HDFC) Chairman Deepak Parekh on Tuesday said that interest rates may rise owing to higher inflation, but lending rates are unlikely to change in the next one month.

Parekh said after the HDFC Bank annual general meeting that surging oil price remains a worry and has a direct bearing on inflation trends. Oil prices have been ruling above $130 a barrel.

Other players, including Punjab National Bank (PNB) and Vijaya Bank, said that higher inflation is putting pressure on their margins and interest rates. But they are also waiting for a signal from the Reserve Bank of India.

PNB Chairman and Managing Director K C Chakraborty said that higher inflation puts pressure on interest rates but added that there is no plan to increase rates at the moment.

However, the bank's Executive Director J M Garg said that banks cannot keep deposit rates low since inflation is rising and turning real interest rates negative.

Vijaya Bank was, however, more categorical and its Chairman and Managing Director P P Mallya said that his bank will decide on a hike in interest rate within the next four days.

Mallya said that he expects another round of increase in the cash reserve ratio (CRR) or the portion of deposits that banks keep with RBI. In the last two months, RBI has raised CRR by 75 basis points to 8.25 per cent in an attempt to control inflationary expectations.

But inflation has only moved up this financial year and was estimated at 8.24 per cent for the week-ended May 24. With the government allowing oil companies to raise petrol, diesel and cooking gas prices, inflation is expected to touch 9 per cent.

There is upward pressure on yield on the 10-year government bonds. The yield touched the 8.30 per cent mark yesterday. HDFC Bank Executive Director Paresh Sukthankar said banks are not rushing to push up lending rates.

"In case, RBI hikes CRR, it will have an impact on the liquidity and cost of funds," he added. On Monday, ICICI Bank Managing Director and CEO K V Kamath had also said that there is sufficient liquidity in the system and he will wait for cues from RBI.

BS Reporters in Mumbai/New Delhi
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