Deposits unaffected by RBI moves; liquid MFs to suffer: SBI

The Reserve Bank of India’s (RBI) move to squeeze liquidity and rescue the free falling Indian currency is an an emergency operation and indicates that it would do everything possible to defend the Rupee, says SBI chairman Pratip Chaudhuri.

Banks on their own can’t determine when to harden rates, it all depends on the market, he told CNBC-TV18 in an interview. “Liquid mutual fund sector has been hit harder because these are all steps for the bond market. It affects the repo rate, finance rate and banks are largely funded by deposit, so deposit rates have not been impacted significantly,” he explained. Below is the edited transcript of Pratip Chaudhuri's interview with CNB-TV18 Q: What do you think would be the likely impact on near-term rates because of what the Reserve Bank of India (RBI) has done overnight and what kind of signals are you picking up? A: The signal is that RBI would do everything possible to defend the currency. Q: At what cost? A: That is secondary. So you do not look at cost. This is an emergency operation. Q: Do you think the emergency operation could be a bit more long lasting as well because till last week many bankers felt it was a temporary measure but this is step 2? A: I didn’t say bankers felt, the government said. But we have to be ready. Whatever RBI feels that whatever time it may have to be taken will have to be taken. Q: Would you say that the measures of the last two instances have already indicated that banks should be hardening rates over the next couple of months? A: Banks cannot decide on their own. It would be led by the markets. Banks have not increased their rates and absorbing the shock. It is the liquid mutual fund sector which has been hit harder because these are all steps for the bond market. It affects the repo rate,  finance rate and banks are largely funded by deposit, so deposit rates have not been impacted significantly. In fact, we got inflow of liquidity about Rs 6,000 crore as people came away from the liquid mutual funds. Q: The impact of the overnight move is to tighten liquidity by nearly Rs 40,000 crore for the banking system, so that is the opposite of what you have been asking for for the last many months in terms of the cash reserve ratio (CRR) cut? A: RBI has its own priorities. So you can indulge in all luxuries when you don’t have an emergency at hand, but since RBI finds that rupee has to be defended and for that every possible drop of liquidity has to be sucked out. Q: What could it do to credit growth which has been struggling already in the system, could it hamper growth? A: Deposit and credit markets are relatively unaffected. What is affecting is the short-term funding and the G-sec rates. Q: What kind of impact would it have on bond portfolios as well for banks? A: Bond market is there, there are no issuances even government is not able to issue. So all these are secondary. Q: Would you say that the culmination of these measures announced might lead to a CRR hike come the next RBI meet, are bankers prepared for that kind of action? A: I cannot say that. But the impact is the same. They have choked up liquidity, the LAF facility has been withdrawn which in terms of liquidity available it is the same as CRR hike. Q: What kind of losses would it amount to on your bond portfolio for the current quarter? A: We have not looked at that because this is affecting the short-term more than the long-term and most of our bond portfolio is in the held-to-maturity (HTM) category. Q: The long-term bond yield has gone up by some 70 bps? So no losses? A: That is right but this thing is HTM. No significant losses. We are yet to take a look because the situation is so fluid.