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            Even PS Banks Are Openly Defying RBI Signals to Control Inflation-Should RBI Not Intervene ?


Rajesh Goyal


On 16th September, 2011 at noon, RBI announced the hike of 25 bps in Repo rate and accordingly other rates viz Reverse Repo and MSF also got re-adjusted automatically to the tune of 25 bps.   RBI in its press release clearly indicates that the monetary tightening is needed as inflationary expectations have remained beyond the RBI's comfort zone.


Everybody knows that by a hike in repo rate, Indian regulator wanted to send a signal to all banks in India to tighten the credit expansion by adjusting their interest rates.  There is no doubt that now banks are free to fix their own interest rates for their assets and liabilities, except for certain categories for which RBI has laid down guidelines. certainly supports this freedom of bank heads to fix interest rates.  However, the reports which have emerged since the rate hike are frustrating.  It appears that under the pressure of industrialists and other groups, Bank Heads are ready to openly defy the RBI Governor's signals to curb the inflationary trend. 


In the report of Economic Times under the heading "Rates Hikes Won't be Passed on to Consumers say Lenders", the CMD of certain Public Sector banks have clearly  indicated that they are not likely to increase the lending rates, at least for the time being.  In PS Banks, there is another problem.  They always look towards one another.  Who should bell the cat syndrome prevails.  Almost all CMDs of public sector banks do not want to initiate the rate hike even if RBI Governor signals it.  They are afraid that if they do it, they may be charged by their peers to have initiated the price war.  They wait till the leaders like SBI do something, and then they meekly follow with some variations. 


At, we view that such statements by Heads of PS Banks are utter defying of RBI Governor's signals and needs to be critically reviewed by RBI.   If majority of banks defy the regulators signals, then what will happen to the economy.  Inflation will not ease.   Banks needs to consider seriously the signals issued by RBI and take steps so that economy is on the track.  


Just a day before the mid-term review meeting, government and banks tried to project RBI Governor as a villain, who  single handed not agreeing to the government, bank heads and industrialists plea to halt the 12th hike a row.  On 14th September, AllBankingSolutions issued a press statement clearly supporting the right of RBI Governor to have his say and not curb his independence.  Thank God, he has not succumbed to such pressure tactics. 


This is the right time when RBI must watch carefully, whether banks are listening to its signals or are just ignoring the same and wants to assert themselves as free from the watchful eye of the regulator.  If banks do not care for RBI, then the regulator needs to look for other options like de-regulating Saving Fund interest rates etc.