Base rate hike unlikely; see 15-16% credit growth: IndusInd

The market consensus is a 25 basis points hike in the repo rate and a 25 bps cut in MSF, but Romesh Sobti, MD & CEO, IndusInd Bank, questions the rationale behind it if inflation is stable, considering the RBI has previously cut repo by 25 bps. But if the regulators see this upward trend in inflation continuing, then the consensus should come through, he says. Now if MSF rate is cut then short term rates will go down, which will be a relief to the market, he feels. If it is combined with other liquidity measures such as raising the repo borrowing limit, then it will be neutral as far as the money markets are concerned.

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But this 25 bps hike is unlikely to translate to base rate hikes, says Sobti. Though the rate hike would mean elevated rates of lending, elevated rates of borrowing for atleast the next two quarters, he says.
If borrowing cap under the liquidity adjustment facility, or LAF, is raised further, then it will have a slightly beneficial impact but increase in repo rate means there is a lot of worry on inflation which means in the medium-term rates are not going to come down. He feels overall expectation of getting a credit growth of around 15-16 percent for the year should be realistic. Below is the verbatim transcript of Romesh Sobti's interview on CNBC-TV18 Q: Inflation is not really stable. The latest wholesale price index that we got for September was at a seven month high, consumer price index is trending at a three month high and well above the 9 percent mark so just in case we do get that repo rate hike of 25 bps what will be the transmission and the impact on the banks?
A: The downward trend in rates that we had seen for the two quarters before July 15, that has been halted. Most banks have raised their base rates as well. So there may not be an immediate increase in the base rates but that downward trend is certainly out. I would imagine that another 25 bps increase in repo rate means elevated rates of lending, elevated rates of borrowing will continue at least for the next two quarters. Q: Do you think there will be any change to the borrowing cap under the liquidity adjustment facility (LAF) which could determine today whether the repo is made operational again?
A: If the borrowing cap is raised further which is an indication of further liquidity at a lower rate even if the repo rate is higher it will still be lower than the marginal standing facility (MSF) rate so it allows banks to borrow more at lower rates. Overall it will have a slightly beneficial impact but increase in repo rate means we have solid worries on inflation which means in the medium-term rates are not going to come down. Q: If we do get the repo rate hike do you think incrementally it is going to impact the credit growth expectations that you have so currently with the repo rate what could the credit growth expectations be for FY14 and if we do get another incremental 25 bps hike will that lower what you are expecting by way of credit growth?
A: Credit growth has actually surprised the market because the usual relationships between gross domestic product (GDP) and credit growth have been blown up. We are seeing credit growth of 16-18 percent for the last two months. We have got to see the trend because there are all sorts of views on whether some of the surrogate credits like some of the commercial paper and bonds etc have come into the bank credit. I don't think that this is going to have so much impact on credit growth because if anything credit growth was at rock bottom 2-3 months ago. I think a few industries have started pulling credit and if there is revival on some of the projects as we hear and especially mining for instance then credit growth should remain at pace so overall expectation of getting a credit growth of around 15-16 percent for the year should be realistic.