Don't see rate cuts, but expect liquidity injection: HDFC

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Don't see rate cuts, but expect liquidity injection: HDFC

HDFC's chairman and chief executive Keki Mistry tells CNBC-TV18 that the Reserve Bank is in no hurry to cut rates, but will inject liquidity into the system soon.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show »

HDFC 's chairman and chief executive Keki Mistry tells CNBC-TV18 that the Reserve Bank is in no hurry to cut rates, but will inject liquidity into the system soon. "Liquidity has been very tight and cost of funds has not reduced in this quarter either, so we expect some kind of a liquidity injection," he said exclusively to CNBC-TV18.

Mistry believes that the RBI is watching out for core inflation figures, the Budget deficit and the rise in oil prices before cutting rates. "In my personal view, it is unlikely that you will see a rate cut happening in this financial year," he added.

Talking about the demand for housing loans, Mistry says that he doesn't see any major change to come soon. "There may be a slowdown in Mumbai because of the high property prices, but strong demand continues in tier 2 and tier 3 cities," he said.

Below is an edited transcript of his interview with Latha Venkatesh and Sumaira Reddy. Also watch the accompanying video.

Q: When do you see EMIs coming down at your end?

A: I don't know if EMI's are going to fall in the near future, but let's talk generally on the economy and interest rates. Inflation obviously has peaked like we can see. I don't think the RBI is going to be in a tremendous hurry to start cutting rates. It is going to watch the core inflation numbers, make sure that the core inflation is under check, they will wait to see what the Budget deficit looks like, they will wait to see that there is no unexpected rise in oil prices and then take a call on starting to cut rates. So in my personal view, it is unlikely that you will see a rate cut happening in this financial year.

Now having said that, the liquidity in the system has been very low. If you take the period starting January up to date, we have had more than trillion rupees being borrowed every single day by banks from RBI and that is way beyond RBI's own comfort level. Yesterday, the amount of money that banks were borrowing from RBI was as much as Rs 1.7 lakh crores.

So clearly liquidity has been very tight and one can expect that some kind of liquidity injection in the system is very necessary. Now whether that takes form of a CRR, a half percent reduction in CRR or something else one has to wait and see. But immediately in the next two months unlikely that you will see interest rates coming down.

Q: So what you are saying is the cost of funds to companies like yours has not fallen despite the G-sec yields falling from 9% to 8.2% and a seeming fall in credit demand?

A: That's right. If you look at the kind of interest rates that have been prevailing in recent times, you will see that short term money is more expensive than long term money. Typically one could borrow five year money at about 9.5-9.6% whereas if someone was to go and borrow short term money then the interest cost is much higher.

Since the duration of our loans is generally higher, average duration of our loans is about five and a half years, we typically target to raise long term money rather than short term money.

Q: Has there been any fall in the cost of your funds in the fourth quarter compared to the third quarter?

A: No, I don't think there is any significant difference between the interest rate differential in the fourth quarter compared to the third quarter, it is broadly the same. But what I am saying is that the spike that you see in the interest rates throughout the year, not just the fourth quarter but even in the earlier part of the year, was more on the short term side than on the long term side.

Q: One hears of a lot of slowdown in capex and consumption. The GDP and IIP numbers are showing that trend. Have you seen demand for home loans slowing?

A: See consumer income has not too much to do with. Our customers typically are middle income households who are salaried employees, and their salary does not depend necessarily on businesses growing or stuff like that. So as long as the confidence level of holding the job is there, as long as consumer confidence is there, I don't see any major change in demand for housing loans.

There was a fear that higher interest rates will result in people slowing down demand for housing loans, but again there are a couple of things you need to look at. The first is that for us, our average loan size this year is about Rs 19 lakh. Let's assume that agreement rate on the loan is say 11%, its effective cost of taking the loan is significantly lower because there are fiscal benefits on the loan. The interest is tax deductible, the principle is tax deductible, so again as a consumer you would know that if someone likes a house, the property is good, your income is stable, and you are not going to not buy the house just because interest rates are 0.5% or 1% lower.

So in the tier 2, tier 3 cities in the outskirts of big cities the demand for housing continues to remain very strong. Where you would see a slowdown perhaps would be in a place like Mumbai where property prices are indeed very high.