Don't expect many takers for yeilds above 8%: HDFC Bank

Ashish Parthasarthy, head treasurer, HDFC Bank feels the Reserve Bank of India (RBI) will be reluctant to use the CRR as a tool to address the concerns of the economy, after its recent measures to curb rupee volatility. A CRR cut or hike would mean a policy shift, something that Parthasarthy says RBI will not go in for in the current scenario.

On the 10-year bond yields, he says yields above 8 percent will have very few buyers, but adds, there will be buying at different levels.

Going ahead, he believes if RBI measures prove to be temporary in nature, the certificate of deposit (CD) rates will come down below 10 percent unless the crisis extends and the rupee continues to be under pressure.

Below is the verbatim transcript of Ashish Parthasarthy's interview on CNBC-TV18

Q: Do you think we will get higher deposits and lending rates anytime soon?

A: It depends on how long and what kind of tightness is there in the market. After the measures there has been a shock value when short-term asset rates have gone up. However, the overnight rates have not gone up to the extent which possibly market anticipated when the announcement was done. So it all depends how long, what level and where will the market find its equilibrium and therefore, its too early to say anything right now.

Q: Despite tough measures announced by the Reserve Bank of India (RBI) the rupee is actually moving towards 60/USD. The dollar has not got cheaper at all. Is there any case for the RBI to let go quickly? Do you think tightening measures can be relaxed considering that the dollar has not responded much?

A: It is not fair to expect the currency rate to respond immediately. The underlying flows definitely point towards depreciation of the rupee. The objective would be to first stabilise it in a range, reduce the volatility by making funding available for speculation, funding rates high.

Over this period of time, when the rates are high, rupee is more or less stable and may find ways to bring in some flows which could be through a bond, through foreign direct investment (FDI) measures. It will take time, but more likely through some borrowing of some nature which would be bonds or a non-resident Indian (NRI) kind of instrument.

Q: Are you mentally prepared for the marginal Standing facility (MSF) rate at 10.25 percent and therefore, tight bond yields for at least a month? In that case won't deposit rates and lending rates be impacted in at least some banks?

A: In an economic cycle for a few weeks the tightening can continue. I cannot see that as a one week kind of an affair if any measure is taken. For a measure to work effectively, it has to be there for at least a few weeks and it could be three to four weeks which is a month. I do not see anything changing earlier than that.

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Q: What did you make of Wednesday's bond auction cancellation? At a time when the RBI is trying to reduce liquidity by not accepting the bids even if it came at a very high rate, will they indirectly infuse the liquidity back in the markets?

A: It is a difficult choice. On Wednesday, all the bids would have been after the shock value. So the bids would be at rates that would be very high. Maybe the RBI was of the view that even in the changed circumstances such a high rate for clearing the auction was possibly not warranted. From both the sides, it would be a case of trial and error, various iterations to figure out where the equilibrium rates are.

I do not think they would like to issue tables at a rate which is possibly not warranted, but on the other hand market participants will also recalibrate their expectations and start bidding in a different way in the auctions for future. No measure is likely to be reversed in a few days or a week. It will be there for sometime till the equilibrium which is acceptable both to the market and the regulator is achieved.

Q: What will be the rate which is acceptable to both the banks as well as to the RBI? If you think a couple of iterations are needed, what will happen to Friday’s bond auction?

A: I don't think me saying a number would be as good as anybody else saying a number. So, I would not be saying that this is the rate which will be acceptable but we all will find out.

Q: What kind of range are you looking for the 10-year yield for the next one month? At what level will you be a buyer? Are you a buyer above 8.1 percent, what is your comfort zone and what is the likely rate?

A: I don't think it will be a case that whether I am a buyer at a particular rate or otherwise, it will always be incremental. As any market participant you will try and figure out, you will come to a level which is good enough to put in some buying rate.

You do that and you will see how things pan out. Are rates coming down from there or likely to go up? So nobody is going to be a large buyer at any point in time in this uncertain environment but you will have different levels where market participants will buy and wait to see what is the outcome of that and it is not going to be zero or one.

Q: You have to take daily decisions on whether you will buy a certificate of deposit (CD) or whether you will buy a bond or sell a bond or CD. Do you see one year CD rates climbing down below the 10 percent mark within the quarter or next two months?

A: If this is going to be temporary, somewhere during the quarters, the CD rates will come down below 10 percent unless the crisis extends and the rupee continues to be under pressure. If we have not found any solution for it then I can't say but otherwise within the quarter it is quite possible, 10 percent is more a panic reaction at this point in time.

You will see slightly lower rates but higher than what they were before. Today, deposit rates are broadly in 8.5-9 percent range and were looking to come down. I think coming down would stop and they would be more in the 9 percent kind of range depending on particular days, 9 percent plus within that band eventually, they will settle down for a year.

Q: If the RBI is reluctant to pay very high interest rates do you see the possibility of them resorting to another method, something like a hike in cash reserve ratio (CRR) rate to achieve its objective?

A: Firstly, CRR is a liquidity tool and secondly, it is also monetary policy tool in terms of what we are doing with the policy. At this point in time, the message is that it is temporary, there is no change in the monetary stance.

They would be reluctant to use it but if other measures are not having results which they desire, they may eventually end up doing it. They would be extremely reluctant to use that tool because it also conveys that we have possibly changed the monetary policy stance.