India's factories are back in business. Statistics shows that Industrial output grew by 3.8 percent in November beating expectations. However, retail inflation is still on an uptrend but the pace of growth has been slower. Ram Sangapure ED, Punjab National Bank spoke to CNBC-TV18 about the chance of a rate cut from Reserve Bank of India. Below is the transcript of Ram Sangapure\\'s interview with CNBC-TV18's Sonia Shenoy, Senthil Chengalvarayan and Latha Venkatesh.
Sonia: What is your own expectation because we just heard from Romesh Sobti at the Indus Ind Bank Conference just a while back and he said that he expects a rate cut only after the Budget. What is your own expectation?
A: I tend to concur with the view that may be the rate cut may come only after Budget or may be around that time, definitely not in the month of January. I don’t see that the Reserve Bank of India (RBI) is inclined to take a call in the month of January itself. Given the volatility in forex markets and also the inflation rate which is now increasing slightly, not really much concern but probably RBI is not very keen at this point in time to take a call, change its stance of monetary policy at this point in time. RBI is concerned about changing the stance of the monetary policy rather than reducing once and again going up after a month or two giving mixed signals to the market; that probably RBI is trying to avoid. They want to take a consistent view in terms of monetary stance.
Sonia: What about the banking system, will there be a lower lending rates in 2015 and if yes by when can we expect that?
A: Lending rates more or less are linked with the RBIs repo rate. If RBI reduces the repo rate there is a possibility that most of the commercial banks will reduce their base rate. Though the base rate formula is little different from the computation of a repo rate, we have our own formula for computation of a base rate that directly or indirectly. Also most of the bankers are linking base rate to the RBIs monetary policy stance and more particularly change in repo rate. Therefore, I visualise that the rate of interest in terms of base rate there could be a reduction in terms of a spread over the base rate, few banks may adopt that policy. However, the core rate of interest in terms of a base rate may change only after repo rate changes and the sense of monetary policy of RBI changes.
Latha: The repo rate has been at 8 percent for a goodish bit, since January when it was raised from 7.75 to 8 it has remained there. However, deposit rates have fallen and they have fallen from probably a little north of 9 to 9 percent then 8.85 percent and now some of State Bank of India (SBI’s) rates are even at 8.50 percent. So clearly you bankers are responding also to falling inflation and falling wholesale rates. Now that inflation is at 5 percent, what prevents you from bringing your own rate down to 8.50 percent? After all you are not borrowing from the Reserve Bank. What does it matter to you if they are lending at 8 percent, you are not borrowing from them?
A: Theoretically you have a point but practically if you look at the non-performing assets (NPA) position of most of the banks, the spread is a result of all these combination of even the NPA percentage. NPA percentage is gone up substantially during the last couple of quarters and the spread if you want to maintain then we have to tweak somewhere. If we reduce the lending rates at this point in time probably we may not be able to maintain our net interest margins (NIMS) and from that perspective if you look at it probably the commercial banks stance right now to continue with the base rates has some sense and some meaning in it.
Latha: How much do you think bank lending rates, first let us take deposit, since you will be more inclined to drop that first say on June 30th ? How much do you expect your deposit rates to be? Will they fall by about half a percent ,do you think if inflation remains at five and a half percent?
Ram: What I visualise is for the fourth quarter probably the deposit rates are not going to come down substantially, because the liquidity requirement in the fourth quarter is usually is higher for the banking industry. May be as you are rightly saying in the month of a June probably there could be a further decline in rate of interest on deposits, particularly term deposits. That we may visualise somewhere between 25 to 50 basis points in a bucket of one year, maybe 90 days to one year bucket. Probably we might see a decline from 50 basis points to 75 basis points.
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