RBI move temporary, won't cut interest rates: SBI

According to the Reserve Bank, the excess liquidity in the system was one of the reasons responsible for volatility in rupee. Hence after the meeting between RBI governor Subbarao and finance minister Chidambaram ended, the central bank raised – marginal standing facility or MSF to 10.25 percent, which is considered an indirect rate hike. The MSF now stands 300 bps above the repo rate (Repo @ 7.25%).

So far banks hadn’t touched the MSF as there was enough government bonds with them and could borrow from the RBI’s overnight liquidity window. However now with the restriction of daily limit borrowings coming into place, banks might have no option but to borrow via the MSF. 

But SBI chairman Pratip Chaudhuri believes it is a temporary measure which has been undertaken to check rupee volatility. "It may be rolled back once rupee stabilises." The public sector bank is not contemplating any change in interest rates, Chaudhuri told CNBC-TV18. The impact of RBI measure won't have a significant impact on the bank's bond portfolio, nor will the MTM losses increase, he said.

Also read: RBI won't engineer slowdown to fix rupee: Deutsche Bank

Below is the verbatim transcript of his interview on CNBC-TV18

Q: First your understanding on what is the impact now, do you think people may even have to raise base rates?

A: At present we are not contemplating any increase in the interest rates. It is not a question of price; it is a question of availability. For State Bank of India (SBI) availability is very adequate, so we are quite liquid and today our liquidity position is very comfortable.

We think these are temporary measures taken by Reserve Bank of India (RBI) to shore up the rupee.

Q: Do you suspect that if the steps stayed on for say a quarter or so then the system could push up rates? If so, by when?

A: I think it will depend on how enduring these measures are but we think these measures are temporary to calm down the volatile rupee.

Q: Could you tell us what the impact on your bond portfolio will be with respect to mark-to-market?

A: Not very significant because most of the long-term bonds are in the held to maturity (HTM) category.

Q: But you are seriously in the money, in the previous quarter we understand you all have made a lot of treasury gains?

A: So, that we encashed.

Q: For this quarter if you end at 8 percent today, the 10 year yield even touched 8.1 and is now at about 8.01, will there not be mark-to-market (MTM) losses?

A: Not at present, it is too early to take a call on that but I think the bond yield should be a function of demand and supply. So if there are not too many auctions then the bond yields may cool down.

Q: Do you think after the open market operation (OMO) is over and even the liquidity adjustment facility (LAF) restriction to Rs 75000 crore kicks in tomorrow, do you think you could see a big shooting up of call rates to 11-15 percent? Will the tightness be even worse tomorrow?

A: We will have to see as we go along.

Q: How long do you expect these steps to stay and do you think growth will get a beating?

A: Once the rupee stabilizes the steps would be largely rolled back. So these are purely temporary steps.

Q: You don't expect loan growth to at least take a beating for the moment and therefore Gross domestic product (GDP) growth to be lower than you previously thought?

A: These are very momentary steps so it depends on how long they stay on. If they are withdrawn or rolled back in good time then it will not have a long-term impact. These are only steps taken to curb the volatility in rupee.

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Q: If not a direct base rate hike do you at least see cost of borrowing for banks going up and if yes what could it be? What will the cost of borrowing on an absolute basis go up by for something like SBI?

A: Our funding source is largely retail; retail cost has not gone up that is why we had said when RBI dropped the repo rate, it does not affect the customer.

Q: There are already banks which have even their savings account going at 6-7 percent, many of the banks are today down 8.5 percent, at that level do you think deposit rates will go up for at least some segments of the banking system?

A: We have not seen that happen as yet. So it is difficult for others to predict. Each bank will have to take a call based on its asset liability.

Q: However, you wouldn’t be surprised if deposit rates went up in the next few days?

A: No I don't think so, because last time also when the RBI dropped the repo rate, deposit rates didn’t go down. I think deposit rates do not have such a close correlation with the money market.

Q: So you don't think this move yesterday is almost akin to a repo rate hike?

A: Yes some people can conclude that.

Q: Do you see for the banking industry per se asset quality pressures increasing in the coming quarter, perhaps one-two quarters?

A: These are all momentary steps lasting for a few days or may be a week or couple of weeks. These are not long-term steps, which would persist and affect in long-term. What affect long-term growth, is long-term interest rates.

Q: But if they lasted for a quarter would you worry?

A: That we will have to see. Then what are the capital flows from equity and others that will also be seen.

Q: Even if the cost of borrowing for SBI does not go up, it perhaps might for the banking industry - then do you see the possibility of credit growth shrinking further or an impact on the credit growth at least?

A: It is too distant and it is not right for me to comment on other banks but so far no bank has signaled a hike in interest rates.

Q: Some banks have said that they will hold in abeyance their decision to cut base rates?

A: That is for them because if their base rates are not competitive, they would not get any loan business anyway.