Interest Rates May Rise After Indian Banks Report Strong Q2 Earnings

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Oct. 19 – Quarterly profits surged for India’s banks thanks to credit growth and easy money, but higher interest rates may pose a threat in the future.

The International Monetary Fund has forecast that demand for loans in India would expand 9.7 percent in the 2010-2011 fiscal year.

“The credit growth in the sector will continue to move up in tandem with the economic activity and that will support the profitability of the banks,” said K.K. Mital, head of portfolio management services at Globe Capital.

However, as India’s economy continues to expand, the central bank may choose to raise interest rates as a way to temper the inflation that tends to come with rapid growth. Although an interest rate spike may hurt retail borrowers and thereby hurt the profitability of banks.

India’s central bank, the Reserve Bank of India, has raised key policy rates five times by a total of 125 basis points since mid-March and there is now widespread belief that another hike may be fast approaching after the inflation rate rose a 8.6 percent annually in September, above the RBI’s comfort zone.

Many investors expect the RBI to raise rates by a quarter of a percentage point by the end of 2010 to curb inflation expectations, and once more by the end of the fiscal year in March.