India pressuring PSU banks to avoid rate hikes: report

Despite the tightening of monetary policy by the Reserve Bank of India this week, the government-owned public sector banks – which control 70 of the country's banking business – have reportedly been pressured by the government not to hike interest rates for customers.

The finance ministry has leaned on the banks to maintain rates in order to keep a large constituency of middle class and corporate borrowers pacified ahead of some key elections, suggests The Times of India.

On Monday night, the central bank – which had been resisting government pressure to cut policy rates – went a step further and tightened credit to offset the impact of the weakening rupee, announcing several measures that will push up the cost of funds for banks.

While there were expectations of banks responding with hikes in the coming days, the finance ministry swung into action and impressed upon banks to maintain the status quo, says the report. By evening the banks had started issuing statements saying rates would not be increased.

The State Bank of India (SBI), the country's largest bank, said in a statement on Tuesday, "The measures taken by RBI are designed to curb speculation in the market and are not seen by SBI as indicative of any systemic problem or deeper malaise. It is, therefore, expected that the position in the market will stabilise shortly. Hence neither the management nor the board of SBI that met today in Mumbai felt that this requires any adjustment of lending."

Subsequently other lenders like Punjab National Bank, Bank of Baroda and IDBI Bank issued similar statements suit.

Earlier on Tuesday, finance minister P Chidambaram seemed to make his position clear, saying categorically that he did not expect banks to raise interest rates. "These measures are intended to quell excessive speculation in the forex market, reduce volatility and stabilize rupee. They should not be read as a prelude to any policy rate changes," he said.