Interest rate hikes will not affect corporate lending; FinMin

New Delhi, July 30 (UNI) The Finance Ministry is of the view that the recent interest rate hikes will not affect corporate lending significantly, thanks to the positive signals on the GDP growth and robust performance of the manufacturing sector.

"Fundamentals of the Global Economy have not undergone any major change. Agriculture, industry, and services are expected to show improved growth and this will help translate into the projected GDP growth between 7.4 per cent to 8.2 per cent during 2006-07. There is continued buoyancy in capital goods segment", Finance Ministry sources say.

The rates started going up from the last quarter of financial year 2004-05 with the Reserve Bank of India hiking its reverse repo rate by 25 basis points to 4.75 per cent in the last week of October 2004. That was the first of a series of six rate hikes. The sources said at present sufficient liquidity is available in the system. The overall subscription to RBI LAF reverse repo has increased to Rs 54,305 crores as on July 11, 2006. The trading activity in call money market and the call money rates have been stable in the last few months. Further, as against the growth in credit of Rs 26,694 crore (1.8 per cent) in April 23rd to June 2006, the growth in credit has been Rs 57,829 crore(2.8 per cent).

The sources, however, said once the credit growth accelerates towards the end of second quarter, banks will have to generate resources to meet the demand for credit.

They noted that many banks have increased the deposit rate with a view mobilise additional resources to meet the needs of the economy.

They have increased the rates in the housing loan portolfio, but the Prime Lending rates have been kept at the same level. "This will squeeze the Net Interest Margins in the long run", the sources said.

In 2005-06, the RBI policy rate moved up by 75 basis points to 5.5 per cent through three hikes in April and October 2005 and January this year. Since then, there have been two hikes of 25 basis points each on June 8 and July 25, taking the reverse repo rate to 6 per cent.

On June 8, the policy rates in India were increased hours after the European Central Bank hiked its key rate by a quarter percentage point to a three year high of 2.75 per cent.

On July 25, the RBI in its first quarter review of the credit policy hiked repo rate and reverse repo rate by 25 bps.

Rising interest rates have become a key worry for investors. Apart from the effect the rise in global rates would have on foreign fund flows, there were concerns about the impact on corporate earnings, consumer spending and stock valuations.

The sources said in the backdrop of the strong fundemantals of the economy, the growth in credit in 2005-06 was 37 per cent. The Banks have been advised to ensure that credit to productive sectors is not affected-- be it agriculture, industry or services.

This is the third consecutive year of phenomenally high credit growth.

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