RBI move to hit banks in short-run; money to come back: BoB

The Reserve Bank of India’s (RBI) move on Monday to reduce liquidity in the market by placing a daily cap on overnight borrowings by banks will lead to increased borrowing costs. SS Mundra, chairman of Bank of Baroda believes that the central bank's decisions will create a short-term disruption in the market as money flow would be reduced in the short term, he says.

But, in the long run, if banks are involved in traditional banking and not just market operations, this move will not change anything fundamentally, Mundra told CNBC-TV18 in an interview. These steps will lead to unwinding of trading positions and the call rates may come back to normal levels of 7.25-7.50 percent in two weeks, he feels. He clarified that the current decisions of the central bank cannot be assumed for not having a rate-cut in its monetary policy. This move is only for getting stability back in the forex market, he adds. Also read: RBI opens new attack to clamp rupee free fall Below is the edited transcript of his interview to CNBC-TV18. Q: How do you see this playing out? Will people, who have cut their base rates, be forced to reverse? A: No, I think it is too early to reach to those conclusions. RBI’s move is a short-term measure to bring stability to the rupee and curb the excessive speculative tendencies in the market. For a bank, which otherwise would have been updating on fundamental principles of raising long-term resources from a normal deposit channel, applying them within a proper asset liability management (ALM) discipline will not change anything fundamentally. In a short run; in the market where a lot of money is coming from the short-term resources and being deployed more on the trading position, this kind of measure can create a short-run disruption. But, for the players who is essentially doing the traditional banking and not only the market operations, I do not think it is going to change anything fundamentally so soon. It would be relevant to wait and watch for a while. Q: The certificate of deposit (CD) rates have gone from 8.2 percent yesterday to 10 percent today. If this persists, even well-run banks are going to see an increase in the cost of the money? A: That is what I am trying to say. Suppose there is a position which is being funded from the repo window in the trading operation, which has not essentially got for the asset creation. So, it is only a situation till such time that these positions are unwounded and money comes back. That is the point. Now to maintain cash reserve ratio (CRR) and statutory liquidity ratio (SLR) is a day-to-day challenge. So today if a window is shut maybe this money is to be covered from these market instruments. _PAGEBREAK_ Q: Do you expect the call rates to come back to 7.25-7.50 levels in perhaps two weeks or something? A: Yes, I would predict a figure as of today. But, I would say it will see a large normalization for the reasons which I just explained. Q: In two weeks time? One cycle of CRR will be enough? A: Yes, that should be a fair guess. And it will also allow unwinding of some of the trading positions and security coming back. That exactly would achieve the intended result, which RBI must have kept in mind while doing so. Q: The other point that the market is discussing is that this is a signal from RBI in terms of changing or reversing the monetary stance altogether. So forget about rate cuts; they will be thrown out of the window and the market should be looking at harder rates going forward. What is your comment on that? A: I think the present action is more oriented towards the forex side of the market. The volatility, which is seen in the rupee because I have yet to see an example where there can be a reversal of policy in such a short span of time. RBI has been very consistent in giving the guidance and very clearly shifting between the short-term immediate measures and the medium-term measures. So personally, I will not read anything like that in this action.