Industrial output growth gathered momentum in September and the CPI inflation cooled off to a record low (since January 2012) of 5.52 percent, providing some signs of economic revival and making a case for interest rate cut. Will Governor Rajan oblige in his December 2 policy?
Discussing the issue, V Srinivasan, Executive Director - Corporate Banking at Axis Bank, said that rate cut would be a difficult decision for RBI and expecting one in December policy is a bit premature.
Speaking to CNBC-TV18, on the sidelines of Axis Capital: India 2020 Stars, Srinivasan said he expects the rate cut cycle to start from next year.
Below is the transcript of V Srinivasan's interview with Latha Venkatesh and Anuj Singhal on CNBC-TV18.Latha: The inflation print was very soft yesterday. Do you expect a rate cut in December or any time soon?A: As far as rate cuts are concerned it is going to be a difficult decision for Reserve Bank of India (RBI) to sort of go ahead with it as far as the December policy is concerned. They would want to see the data flow over the next couple of months and see it is consistent with their overall objective in terms of January 2016 before they sort of take a final call on that.So the December rate cut is a bit premature but the rate cut is coming faster than what people had anticipated at least a couple of months back and that possibly is somewhere towards the early part of next year.Anuj: So in that case how much of a rate cut do you expect in the next 6-12 months?A: We are not talking of rate cuts happening at one time and then nothing else happening. So it is basically a cycle which will start and clearly it starts with 25 basis points, utmost 50 basis points but the whole thing one needs to get comfortable is that plays out over a period of time. It is important for the rate cut cycle to stay on course for a reasonable amount of time for us to get benefit. So if it is going to be a stop start sort of a cycle it doesn’t work for anyone, neither for RBI, nor for the market. So I would think being convinced of the rate cut cycle and it playing out over a period of time which is fairly long that works in everyone’s interest.
Latha: Irrespective of whether the RBI cuts rates or not, banks have been cutting deposit rates, do you expect deposit rates to fall further?A: It is a function of demand and supply. Credit growth has been fairly weak and clearly a need to raise further money has also been weaker. So to that extent banks have been happy to sort of lower deposit rates.Second half tends to be typically busier than the first half and as we approach the last quarter, you would see credit growth even though weaker than the previous year atleast higher from where it is today and demand for money also being higher. So I would think deposit rates would stay soft but its contingent on how credit growth shapes up. We need to see credit growth sort of fall off dramatically more for deposit rates to ease further.Anuj: Talking about credit growth, what is your personal assessment of when credit growth is going to pick up?A: I would think this year continues to be fairly muted and I would think credit growth of around 15 percent is the best case scenario as far as we can have as far as this year is concerned. This is also predicated on the back of rate cut expectations and bond markets providing money to high grade corporates to borrow money. If this continues, I would think growth upwards of 15 percent looks difficult as far as FY15 is concerned.Latha: There has been marginal improvement in the margins of banks. I would assume it is because the cost of funds is falling for banks, how do you see that panning out, the cost of money?A: Cost of funds for banks continues to be fairly stable with a downward bias. If you look at instruments such as infra bonds and if banks continue to be comfortable raising infra bonds, that also helps in terms of reducing the cost of funds to some extent. So I would think cost of funds would remain stable with a downward bias as the rate cut cycle sets in, you would see a further drop as far as cost of funds is concerned.Anuj: What is your view on the NPA cycle, has it turned for the better for both PSU and private banks?A: We have always said that FY15 looks similar to FY14 and I think that is how this year is playing out. Even now we believe that in spite of equity markets sort of pricing in much better days, we think better days as far as banks are concerned is more FY16. FY 15 is going to be very similar to what we saw in FY14 in terms of the asset quality pressures are concerned. FY16 as a lot of the measures, which the government has embarked upon plays out, hopefully we should see better days.Latha: What about consolidation in the banking sector, there is a lot of buzz around ING, every other bank seems to be interesting in buying that bank, is Axis looking at buying this bank or are you targeting any potential targets?A: This has been a topic which has been hotly debated over many years and I think it will continue to be. It is going to be a slow process and I think each bank will evaluate its options as and when anything comes along but as of now I will think it is still on the drawing board for most banks and I don't think any action in terms of a large scale action is likely to happen over the next few months.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
