Interest rate hike unlikely in Dec: Keki Mistry

Excerpts from Bazaar on CNBC-TV18 Watch the full show »

Keki Mistry, Vice Chairman and CEO, HDFC has said that interest rate hike is unlikely going forward, though additional costs may be fully passed on gradually. The Reserve Bank of India's (RBI) credit policy review is scheduled on December 16.

In an interview to CNBC-TV18, Mistry said that RBI may not hike interest rates in the near future. He also said, "Overall inflation numbers likely to see reduction and commodity inflation should begin to taper off here on."

Mistry believes that markets have already factored in advance tax rates impact.

Below is a verbatim transcript of Keki Mistry's interview with CNBC-TV18's managing editor Udayan Mukherjee. Also watch the accompanying video for more.

Q: Is it an issue which will crop up because of the spike in wholesale rates that you have seen at HDFC as well. How tight is the wholesale market?

A: The short-term market is a little tight. Long-term money is still available and even though short-term money is available, it is just that interest rates as you see in the system have gone up a fair bit. At the end of the day we have gone through various interest rate scenarios.

We have seen scenarios where interest rates in India have been extremely high and we have seen scenarios where interest rates have been extremely low. Right through this period of the last decade, our spreads have typically being in the range of 2.15% to 2.35%. We are extremely confident that not withstanding where rates go, our spreads will remain in the 2.15% to 2.35% range going forward.

The reason that happens is because we take no mismatch on our funding. Whatever loans we give to our borrowers on a fixed rate basis, we fund it out of matching term fixed rate liabilities. Floating rate loans are given out of floating rate liabilities. So there is no interest rate mismatch that we take.

If the interest rates in the system increase, we increase our lending rates when interest rates come down we reduce our lending rates and ultimately the benefits of lower rates or cost of a higher rate is borne by the customer. That is how the spreads remains stable.

Q: You have actually increased the retail prime lending rate by 75 bps on December 1, does that take care of everything?

A: Absolutely. I don't personally believe that you will see much higher interest rates going forward. I would think that if you get into the January-February-March period, you could see a little coming off of inflation. Inflation numbers should start looking a little lower.

I know commodity prices are high and that could be a drag on inflation. But nonetheless apart from commodity prices, the fact is that the base effect will start kicking in. Food prices will come off. Overall inflation numbers will start looking a little lower.

I don't really think that the RBI in the near future is going to increase interest rates. As government spending increases, the yield curve which has flattened out completely will start steepening a little bit and rates will not go up too much from these levels. I am reasonably confident, that for the next two-three months we will see reasonably stable rates. Maybe if we are lucky and if inflation really comes off, we could start looking at lower interest rates in the next financial year.

Q: Specifically for the wholesale market do you not see things getting tighter with advance tax out flows and things like that for the next few weeks?

A: The market has already factored in the fact that there is an advance tax payment that is due on December 15 so markets reflect the fact that in the next 10-days people will have advance tax payment. I do not see that impacting the markets except for a day or two. We don't borrow money during that period of time.

The other thing is if you look at our policy over the years, we have always kept a very flexible approach as far as funding goes. In a high interest rate environment, retail deposits have always been the prime source of funding for us.

In a lower interest rate environment, wholesale funding becomes a lot cheaper than retail funding. If you look at our funding over the last two-three years, the difficult year of 2009 when interest rates in India were really shooting up, particularly, during the period of October 2008 to December 2008 - in that period 90% of our funding had come through retail deposits.

The strategy that we have followed over the years is to keep at least 25% of our incremental funding through retail deposits and the balance 75% could then be a mix of either wholesale or retail, depending on where interest rates are.

In a low interest rates environment wholesale funding will be a more important source of funding, in a high interest rate environment retail deposits will be a more important source of funding.

Q: You said 2.15% to 2.35% I know it is not a very large spread, but in this current environment could it be closer to 2.15%?

A: Frankly, I do not think so. In September we were looking at spreads of around 2.34% and we have always guided our investors' say - that if you take a long-term view not looking at it month to month, you should look at spreads in the 2.2-2.3% range. At least when we close December, we should be looking at spreads which are closer to the 2.3% levels than otherwise.

Q: Real estate prices have been going up in many of the cities and towns and that could affect loan growth for a company like you? Do you see that as a legitimate concern?

A: Real estate prices have gone up a lot. We track this very closely. We have a metrics where we look at the cost of a house of an average customer of ours and we look at the income of the individual. We found that the cost of a house as a multiple of the annual income of our borrowers now in September-end stood at 4.7 times.

I do not think anything has happened in October-November-December to change that number in any significant manner. A house still costs about 4.7 times the income off our borrowers. If you look at this over the last five-six years, it has ranged between 4.5 to 5. It is pretty much inline with where it normally has been.

People tend to look at Mumbai and Delhi and particularly, Central Mumbai, South Mumbai and think that property prices have gone up across the country. Yes, they have gone up but they have gone up in response to higher income.

As we track this, we do not find the level of affordability having deteriorated significantly. In March, when people had got the increase in salaries, at that time the cost of a house would be about 4.5 times to income of our borrowers. Now it is about 4.7 times.

Q: You said that the Reserve Bank will not move anytime soon but the way crude has moved to USD 90 do you think it will weigh on their mind?

A: I am sure it is going to weigh on their mind but at the same time, crude at USD 90 may not be as much of a problem as crude at over USD 100. We have always said that one of the worries that we would have to the India growth story would be oil prices. If oil was to go much above USD 100 it would start impacting the deficit.

But at these levels, I think the RBI will keep a close watch but I do not see them increasing rates at this time. There is tightness in the market and everyone recognizes that. Some amount of government spending as it enters the system will help in releasing the liquidity.