The reaction in the bond market was really post the monetary policy announcement, when the hawkish tone of the policy caused this huge surge in the bond yields and the crash in prices, says Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank.
Speaking to CNBC-TV18, she noted two years ago, bank deposit rates were near 9 percent and are now down by 200 basis point. She expects stability in deposit rates in the near future, unless the sluggish credit demand falls further.
She said banks will not raise MCLR rates currently as the cost of deposits and cost of funds have not moved much.
Below is the verbatim transcript of Shanti Ekambaram’s interview to Latha Venkatesh on CNBC-TV18.
Q: Your first love used to be bond markets and now we have seen this huge crash in bond prices ever since the monetary policy was announced. What is the impact for the saver, are we going to see the end of at least deposit rate cuts?
A: I think the reaction to the bond markets was really post policy when not so much the cut in the rate but the hawkish tone of the policy as you yourself have said really caused this huge surge in the bond yields and thus the crash in prices. So, I think two things that I see forward, if we look at the last two years and I was talking to someone, two years ago you had bank deposit rates at about close to 9 percent, now it is about 7 percent. So, savers have seen 200 basis points drop.
I think you are pretty much going to see some stability for some time before banks drop rates, unless the credit demand which is currently also sluggish falls further and the investment cycle which is still elusive from the corporate side, still remains very sluggish. Unless we see some dramatic drops, I think the deposit rate stability is perhaps there for some time to come barring any unforeseen events.
So, if deposits are going to be stable for the saver and you have seen a large transmission of rates by banks through MCLR, the lending is also going to be stable. So, for some time you will see some stability in deposit rates for the savers for sure. Remember the small savings rates are still at 8.10 percent so the government keeping it there, you will see some stability.
Q: Some banks like you offer 6 percent even in your savings rate. Is there a chance you will have the elbow room to cut that part considering the savings glut in the system?
A: I think the way you have to look at it is, if your one year term deposit rates is at 7 percent today, you still have a little bit of room when you look at the savings accounts because if you look at the average cost of our savings account, it is around 5.5 percent. We have moved very marginally the top end of the savings band for very large savers like Rs 5 crore and above, but I think you have to wait and watch that if this 7 percent continues to be stable, you need to see how -- so we have some time and some elbow room at an average cost of 5.5 versus a term deposit rate of 7 percent.
Two things, I think banks flush due to demonetisation on account of CASA, but I think if you look at the trend of the last one week to 10 days, and you are seeing incrementally cash withdrawals in the system increasing from February 20 and March 13 when the entire control on savings account is lifted, you will see incrementally cash been withdrawn. Two things I am seeing, people are now reverting to using cash for their transactions. So, I think you will see retention, but we will have to wait and watch. So, there is stability in deposit rates, some time to go perhaps.
Q: In MCLR you as well, like many of the public sector banks, you cut your lending rate by about 0.5 percentage point, is that it, now should we expect you or the system to cut rates further given what a 50 basis point rise in bond yields?
A: I tell you MCLR firstly like all ALCOs of banks look at their cost of funds, look at their entire asset liability duration mix and then take a call, so, I think if we look at the cost of deposits and cost of funds, those still have not moved. As a bank one would clearly look at this is a marginal fund, the way it moves, I think you will see some stability. I don’t see banks raising MCLR immediately, but for the moment perhaps we will have to wait to see if there is any further transmission because a lot of transmission has happened. So, again, even on the lending rates, perhaps you will see stability for some time.
For full interview, watch video.