RBI move signals comfortable liquidity situation: ING Vysya

The RBI's 50 bps rate cut was beyond expectation, stated Shailendra Bhandari, MD & CEO, ING Vysya Bank. This rate is a very stong signal that the liquidity situation will be comfortable going into May, and hence, translate into base rate cuts by banks, he said.

According to Bhandari, as the pressure on deposits comes down, if decline in margins would come back in the next quarter starting July.

Below is an edited transcript of Bhandari's interview on CNBC-TV18. Also watch the attached video.

Q: How much elbow room is there for lending rates and deposit rates to fall?

A: I think the 50 bps rate cut was beyond most of our expectation. In a way, it’s quite interesting and important that the RBI has done that. The previous two rate hikes they did, which was 8-8.25 and 8.25 to 8.5, most banks, including ours, did not raise the base rates. So there was enough body language from the banks that if it was just one rate cut, banks might not actually translate this through into a decrease in rate to the customer. Now with 50 bps cut, which is a very strong signal, and an indication that liquidity should get more comfortable going into May.

This is a strong signal to all of us that at some stage, rates should be cut sooner rather than later. So, most of us are quite happy with this and we would wait to see some of the larger banks take the decisions. Our own Asset Liability Committee (ALCO) will be meeting later this week but I would expect that there would be a base rate cut happening over the course of this month.

 Q: Will the base rate cut be in the range of 0.25-0.5%?

A: I would be surprised if it’s as much as half. Like I said, after the last two increases in the repo rate, banks didn’t raise the base rate but I would expect some sort of a cut.

Q: How do you expect margins to pan out?

A: I think there would be some carry forward effect from the previous quarter on most banks’ balance sheets. So what would have happened is that at the end of the March, banks did put on some deposits. Even if those run out before June, there will be few months in this quarter. Also, what happens is that a lot of banks were scrambling to meet the priority sector requirements, it was the end of March and that class of asset tends to reduce the margins.

It typically tends to be at lower interest rate and I think most banks have discussed this. It is fairly seasonal that we do see better in the June quarter, there is a tendency for margins to come down. But as we see the pressure on deposits coming down, if there is any decline in margins, I would expect that to come back in the next quarter starting July.

Q: Do you think there is enough in the policy, as well in the expected rate cuts to increase credit off take, that investing machine that had come to a stand still, does it get cranked up or does it not?

A: As the path slowed down within industry, which was capital formation and investments, that is driven by sentiment, I think this is very positive. As you know, part of the reason investments had come to a stand still was not just interest rates and monetary policy, it included a host of other policy issues including land acquisition but I think this is a very important step.

The expectation obviously that there might be more rate cuts might help. It is probably not enough in itself but it will certainly change the mood. I would expect from doom and gloom, balance mood will help sentiment.