MSF rate to fall more, base rate hikes on hold: Yes Bank

Money has got cheaper in terms of incremental deposits though the market is still adjusting to the new rates that the Reserve Bank (RBI) has set, says Rajat Monga, CFO, Yes Bank. He says the industry is expecting a further 75 bps falls in MSF rates by RBI's next policy meet. Until then the banking industry will put base rate revision on hold.

The RBI, in its September 20 mid-quarter policy review had lowered MSF rate and hiked repo rate. Also Read: SBI well capitalised; rating cut won't impact local biz: MD Below is the verbatim transcript of Rajat Monga's interview on CNBC-TV18 Q: Has money got less expensive for people like you. What is the improvement in terms of cost of money?
A: Money has got cheaper in terms of incremental deposits though the market is still adjusting to the new rates that Reserve Bank of India (RBI) has set. I think one can assume that the money will get cheaper by up to 75 bps. The deposit market is a bit sticky on the way up as well as on the way down. So, while it was not pricing in the full increase that RBI had push through in its earlier stance, it is also taking a little bit of time to adjust to the now reduced corridor that RBI has set on the marginal standing facility (MSF). Q: Do you see base rate hike in the system on the back of what came out of the RBI policy on Friday?
A: I do not think it is a given any more. Had RBI not taken this reduction of the MSF rate, base rate increase in industry would have been in order. Possibly the banks that have not raised base rates might still be looking to rework their numbers and we might see some base rate increase. However, I do not think it is a very clear given, since the expectation of the MSF rate coming down further remains. MSF rate may come down by another 75 bps by the end of October, by RBI next policy. I think that is a risk which people will want to see before they take a view on base rates. Q: How would margins pan out this quarter and next quarter compared to what it was in the first quarter?
A: The margins should be in a reasonably narrow range as we were relatively early in raising our base rate. So, what base rate increases do normally is that it does the reprising of the whole loan book and at Yes Bank we do have a fairly substantial, I would say up to 90 percent of our loan book is floating. So, the reprising of the loan book overcomes a lot of the reprising on deposits because the deposit reprising is coming only from new deposits and that would be maybe 5-10 percent every month that the new deposits are going to be reprised. So, as of the current situation, margins are in a tight range. If the RBI policy persists and for much longer then margins would be a case of management. Q: What about loan growth, what is your estimate about loan growth going ahead because the view in the market is that because of repo rate hike it could threaten an already sluggish credit growth that we have seen in the system?
A: At some level I have a bit of a different view which is that as interest rates go up, loan growth increases because loan growth has two components in my judgment; one component is the real economic activity so we can proxy that for real gross domestic product (GDP) and the second component that loan growth will have is interest rates. So, I would add these two. So, whatever is the nominal interest rate and the real GDP growth on the ground is something that should total to credit growth in the banking system.
These are very approximate kind of indicators but it is something which we have seen many times in the past. So, loan growth falls only when interest rates fall. Typically the fall in interest rate is also concurrent to a slow economy. Today, we have a bit of the off the cycle situation where interest rates are going up and economic growth is going down and we are also seeing loan growth increasing as a bit in terms of the effects on the ground being felt.