Banks are ruling out an immediate hardening of interest rates and will wait for cues from the Reserve Bank of India before effecting any changes.
Most bankers said that unlike last time when inflation was above 6 per cent, the government this time has a bigger role to play than the Central bank since most price pressures are emanating from rising food and metal prices.
Besides, credit offtake is also showing signs of slowdown, especially on the retail loans front.
Latest data showed that inflation based on wholesale price index touched a three-year high of 7 per cent.
"There is no immediate impact on the banks and we will wait for signals from RBI... I do not think there is an immediate hurry to take a decision on changing rates," said Punjab National Bank Chairman and Managing Director KC Chakraborty.
While Union Bank of India Chairman and Managing Director M V Nair said that higher inflation has put pressure on interest rates levels, but he will wait for signals from RBI in the monetary policy due later this month before deciding his stance.
"A tight monetary policy seems to be on the cards. We may see banks reversing some of the cuts initiated by them earlier this year," said IDBI chairman Yogesh Agarwal.
Last weekend, after inflation based on wholesale price index touched 6.68 per cent, IDBI decided to put on hold its earlier decision to reduce benchmark prime lending rate.
India's second largest bank, ICICI Bank, which did not cut rates earlier this year when most other players reduced interest rates by 25 to 50 basis points, seems to have a different take.
"My policy always has been to look at market conditions before taking any step and when other banks were cutting rates, we did not cut rates. If I were to look at current context; we are in a very comfortable liquidity situation. Last year this time (March 2007), banks were paying 12.5 per cent for one-year deposits. Today, we are paying 9.8-9.9 per cent for one year money and that indicates what sort of liquidity we have," said ICICI Bank chief executive officer and managing director KV Kamath.
His colleague and joint managing director Chanda Kochhar added that interest rates are expected to stay around the same level for some more time.
"Banks must analyse more than just policy signals. Cost of funds is crucial," she said on the sidelines of a seminar organised by CII.