State Bank of India chairman O P Bhatt said on Monday interest rates could go up to 100 basis points if liquidity condition tightens in the coming months.
Given the present liquidity condition and the government borrowing progamme, which is likely to start in the near future, there could an upward pressure on the interest rates, Bhatt said at the Banking Conclave organised by the Federation of Indian Chambers of Commerce and Industry in Kolkata.
"There is a possibility of interest rates going up by 25 to 100 basis points, if liquidity is not managed well when the busy season picks up," he said. The busy credit season in India usually starts from October and continues till March.
With the government borrowing programme yet to start, the movement of interest rates would depend a lot on that, Bhatt said.
As per the Budget estimate, net borrowing by the government in the current fiscal is pegged at a whopping Rs 3,97,957.47 crore (Rs 3,979.57 billion) to fund its widening fiscal deficit projected at 6.8 per cent of GDP this fiscal due to a slew of measures taken to boost the economy, which is facing the impact of financial meltdown.
Stating that the banking system is flushed with funds at present, SBI chief said that as of now there is so much of liquidity in the system that more than Rs 1 lakh crore (Rs 1 trillion) is being put by various banks with the Reserve Bank of India.
"If liquidity is managed in way there is positive surplus liquidity available in the system then the interest rates will not go up significantly or not at all," Bhatt said.
But if liquidity is not managed well and demand for bank funds goes up, it is logical that the bank rates could go up, he added.
Talking about new ventures, Bhatt said that SBI would start custodial services as a joint venture with German financial major Societe General. The foreign partner would have a 35 per cent stake in the JV.
The entity would target the FIIs, he said.
Bhatt said that the bank would start non-life insurance business next year.