RBI suggests banks to keep interest rates stable to ensure economic recovery

In a pre-money policy review meeting the Reserve Bank of India (RBI) governor D Subbarao and the deputy governors told the PSU bankers to keep interest rates stable so that the economic recovery does not get weak.

The RBI said when bankers say increase in the profit on bonds; rising wholesale price inflation and high government borrowings point towards increase in deposit and lending rates therefore they should abstain from random increase in interest rates.

Bankers on their part said they have no tendency to raise rates but due to rising inflation, greater credit demand in the coming months and the government borrowing program taking off Rs 1.23 lakh crore by February, might be forced to raise key rates.

Bankers told the central bank “Taking all these factors into consideration, we may be left with no option but to hike rates”.

The meeting was held ahead of the October 27 monetary policy review, the chief of eight major Indian, private and foreign banks attended the meeting.

RBI issued a paper to the banks in which it had suggested for the exclusion of loans given to sugar mills for on-lending to farmers from priority sector lending, in a response to this the bankers said if they follow this suggestion then it will be difficult for them to meet the priority sector lending target of 40 per cent of total advances also RBI will have to reduce the priority sector target to 20 per cent.

The RBI has planned to categorize lending to sugar mills for on-lending to farmers under indirect finance.

A senior PSU banker who had attended the pre-credit policy meeting said, “If items under priority sector are taken off, then banks will find it difficult to achieve the 40 per cent target”.

In the pre-credit policy meeting between bankers and the RBI loans to priority sector was the major point of discussion.

Earlier, RBI had categorized lending to electricity boards for on-lending to farmers for purchase of motor pumps under priority sector lending. But now these lending has been classified as indirect finance.