RBI rate move: Bankers see further policy cuts

Both public and private sector banks have cheered the Reserve Bank’s cut in the repo and reverse repo by 1% each. Most banks had not responded to earlier RBI cuts. So, will the excess liquidity now with banks translate in a fall in lending, deposit rates?
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Dec 08, 2008, 10.39 AM | Source: CNBC-TV18

RBI rate move: Bankers see further policy cuts

Both public and private sector banks have cheered the Reserve Bank’s cut in the repo and reverse repo by 1% each. Most banks had not responded to earlier RBI cuts. So, will the excess liquidity now with banks translate in a fall in lending, deposit rates?

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RBI rate move: Bankers see further policy cuts

Both public and private sector banks have cheered the Reserve Bank’s cut in the repo and reverse repo by 1% each. Most banks had not responded to earlier RBI cuts. So, will the excess liquidity now with banks translate in a fall in lending, deposit rates?

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Keki Mistry, MD and VC, HDFC

Both public and private sector banks have cheered the Reserve Bank’s cut in the repo and reverse repo by 1% each. Most banks had not responded to earlier RBI cuts. So, will the excess liquidity now with banks translate in a fall in lending, deposit rates?

 

Also Read: RBI cuts repo, reverse repo rate by 100 bps

 

So what to do experts read in to these rate cuts?

Keki Mistry, MD and VC, HDFC, said, the measures taken by the RBI are extremely positive. Mistry believes when the repo rate gets cut directly it doesn’t impact the cost of funds because they cannot draw under the repo window, as banks borrow on the repo window.

"So when banks borrow at a lower cost, I am sure they will pass on the benefit to the end users and if our cost of our funding comes down definitely we will look at lending rate. In recent times costs have gone up significantly but we haven’t increased rates."

 

Yogesh Agarwal, Chairman, IDBI, said, RBI's measures very strongly signal that liquidity is not the major concern now and the steps are designed to signal the interest rats to come down to the extent that it will help in the credit off tick.

 

 

Shubhada Rao of Yes Bank said the monetary measures have come in as per expectations and the move is positive to revamp the Indian economy. He also feels that now fiscal measures are needed to revamp the sector issues too.

 

 

 

Chanda Kochar, Joint Managing Director of ICICI Bank, feels there is no fall in credit off take because there is a whole lot of requirement of rupee liquidity. She said, “We are seeing other sources of financing if there are lesser ECBs coming into the system.” She said, This is clearly a signal in the market that interest rates should soften. So the direction is set definitely; how fast it would happen I don’t know?” She, however, doesn’t feel that it should take very long.

A Prasanna, Chief Economist, ICICI Securities, said post the RBI move, SLR cut could be in the radar sometime in the next quarter.

 

 

Policy rates: Road ahead

Abheek Barua, Economist, HDFC Bank, said, rate cuts are in line with expectations and going ahead he expects CRR cut too.

 

Indranil Pan, Economist, Kotak Mahindra Bank, also believes that rate cuts are in line with expectations and sees a CRR cut as well.

With respect to policy rates, Kochar said that the deposit rates are partly dependent on what happens to the overall liquidity in the system. It is not the question of how the liquidity is currently. Currently, liquidity is absolutely adequate and the measures that have been taken have gone a long way in ensuring the entire stability in liquidity and financial system in the country.

 

Kochar said that the deposit rates are partly dependent on what happens to the overall liquidity in the system. It is not the question of how the liquidity is currently. Currently, liquidity is absolutely adequate and the measures that have been taken have gone a long way in ensuring the entire stability in liquidity and financial system in the country.

 

Prasanna said said there could be some more borrowing, and expects a SLR cut by next quarter.

 

Will lending rates be cut?

 

KC Chakrabarty, CMD, Punjab National Bank or PNB, said the bank may look at cutting rates again in January. However, he doesn’t see bulk deposit rates falling sharply, but banks will cut PLRs, or Prime Lending Rates.

"If you talk of high cost deposits or bulk deposits, they are of the maturity of six months to one year and even if the rates come down these are all fixed for one year, so I don’t see bulk deposit rates coming down very abruptly during this year.

 

But what will happen is that benefit is available, so the banks will be reducing the PLR gradually. One more advantage is that today the PLR has lost all its relevance, so people are lending PLR plus 5 and PLR minus 3.Thus, we will bring down PLR drastically, but we will not give any sub-PLR lending." 

Prasanna, said, "As far as lending rates are concerned we expect banks to cut lending rates by around 100 bps."

Agarwal said, "Our rate continues at 10.5%, because the media had announced that RBI is coming with some steps today, so after today we are considering to reduce the deposit rates soon. There is no point in reducing in two stages as one on December 1 and one again now, so now it will happen all in one package."

"On the deposit side we see about 1% cut. On the lending side, it may not be the same, because when the public sector banks had cut their PLRs to 75 bps, that hadn’t justified the situation then and in some ways it was jumping ahead. So it will come down, but a 75 basis points cut had already taken place a couple of weeks back," Agrawal added.

 

Kochar said, “We don’t actually have to wait for measures and then take this call. We look at this on a daily basis and we could have well waited to announce our cut in the priority sector home loans till this announcement was made, but we did not think it was necessary to do so because we thought whatever the market rates were, it justified our cutting rates on the new home loans.” She added that it is not to be linked with announcements as such, it is to be linked with how the market rates move and we look at it on a daily basis.

On inflation:

Mistry said the rate at which inflation has come down is probably faster than the rate one was expecting. The drop in diesel and petrol prices will have a substantial impact going ahead. There will be a material drop in inflation by June, because of the base effect and the base effect will significantly pull down inflation in June.

Pan said the move is quite positive, given the fact that economy is slowing down and inflation is easing off. He sees inflation to be significantly below 7% level going forward.

Prasanna sees FY09 GDP growth at 7.5%, FY10 at 6%. Meanwhile he sees inflation to be at 2% by March, and that it may also turn negative by July.

Mishr believes inflation will come at 3% by March-end and will turn negative by May, due to higher base effect.

Where do you see 10-year yield heading?

Prasanna said, "We would see the rally in the bond market continuing and at the first instance you would see the tenure going to 6.5 and probably the rally can extent beyond that. But the supply is quite large, so the market will have to navigate its way through the supply, and the tenure can dip to as low as 6% by March end.”

Hemant Mishr, Head Global Markets, Standard Chartered Bank, said there won’t be any immediate cut in lending rates by banks, but the 10- year bond yields will rally to 6.50 in short term.

 

 

Ashish Partasarthy, Deputy, Head-Treasurer, HDFC Bank, said, "Most of the expectations are already built in, but the tenure could trade a bit lower, but it will be very range bound and will be ten basis points here or there. “We see the rate to be lower because we expect that there could be further rate cuts till March, liquidity will be there and the new borrowing program is not that heavy so we would see it lower than what it is today.”

 

Barua said in long term, yields will go down to 6-6.25% by March-end.  

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