RBI policy, currency moves key to hike rates: BoI

VR Iyer, CMD of Bank of India echoes the stance presented by other banks such as Andhra Bank and HDFC on raising rates. She believes that it is too premature to think on the Reserve Bank of India’s (RBI) moves to tighten liquidity furthermore.

The outcome from the RBI meet on July 30 will decide the future course of action on the rates front, she told CNBC-TV18. The loan growth expectations may be lesser by about 2-3 percent overall as credit has taken a hit in the past few months, Iyer says.

Also read: Up-to-date with fund needs; won't hike rates: HDFC's Mistry

Below is the edited transcript of her interview to CNBC-TV18.

Q: What have you made of the steps? Are you already contemplating a possible increase in deposit rates? Would you just want to hear out the governor on July 30 before you take that inevitable step?

A: It is little premature to think or examine for increasing the rate on the deposits side. We have to wait and watch how long it will last. If it is going to last longer then there is a need for the bankers to increase the rate of interest in the deposits and lending rates.

Q: We just spoke sometime back to BA Prabhakar of Andhra Bank, to Keki Mistry of HDFC; it is a similar answer that we have to see how long it will last. What is your definition of long? When will your discomfort kick in? Will you be willing to wait to see whether 10.25 call rate prevails for 4 weeks, 6 weeks? What is the mental time you are giving?

A: As of now we are comfortable on the liquidity. We are not on the borrowing side.

Q: But you will be on Monday I would assume, when the new cash reserve ratio (CRR) number will come.

A: I do agree that generally in the first fortnight of the last quarter, the liquidity tightness always is there. The general borrowings are around Rs 1,00,000 crore that has got reduced to almost Rs 36,000 crore. If that is so, the banks will have to borrow at a much higher rate of 10.25 percent.

At the short end, there may be a case and there will be a need for us to increase the deposit rates then. So, we will just wait and watch how the currency moves, which is more important. Then we also will get a clear signal from the RBI what will be the measures then.

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Q: The RBI is now not resting on just one step. Week after week, some steps have been seen. Do we now have a definite shift of monetary policy altogether from the RBI – that really is the big worry? Is that something that you can sense from the recent moves?

A: As of now, indirectly RBI has increased the CRR rate - there is no doubt about that. By insisting on the bankers to have minimum of 99 percent of CRR requirement on daily basis bankers in effect we may be ending up keeping 4.4-4.5 CRR as we will not have much control over the inflows.

So, at any point of time, we will be maintaining more than 4. So, that is what is going to happen. But then I would still maintain that we need to see how long these measures would be there. Only then we can take a definite call.

As on today we will have to hold on and wait and watch.

Q: There are some estimates coming out. People are saying that they expect the bank loan growth this year to fall to as low as 10-12 percent. What is the sense you are getting at this stage? We have 7-8 months of the year left.

A: The system growth, RBI said, will be around 15-16 percent. We started off with a much more optimism in the first quarter of the current financial year and we are ofcourse not witnessing that (now).

Right from May, we are not witnessing that kind of expectation of a credit growth. So, may be the credit growth may have to be lowered by about 1 or 2 percentage points.

Q: Do you have any thumb rule on this much of a fall in bond prices will give you so many crore of losses on your mark to market (MTM)? Is there any such formula or much will depend on where you have taken profit?

A: Much will depend on individual banks’ position. As of now a major portion of the bonds are in the held-to-maturity (HTM) category. But even though bank may be having 1-1.5 percent only in the non-HTM category, even a slight fall can give you a much greater HTM losses.

It is not going to be comfortable. We will have to provide as a result in the heavy MTM losses.