Mkt stabilisation scheme, more than CRR, will bring relief:StanC

Speaking to CNBC-TV18 Ananth Narayan of Standard Chartered Bank said that the market will continue to remain in excess liquidity. Lack of credit offtake, economic slowdown in the quarter coupled with surplus deposits in banks will mean a soft corner for bonds, he said. Lack of avenues to deploy cash will also drive the market towards bonds, he said.

He also said that if excess money is drawn out through the CRR window, the rates that banks will get is 0 percent. And so to the extent to which CRR gets replaced by MSS (market stabilisation scheme), there will be relief, he said, adding that he is hopeful of more measures to counter the excess cash in banks.

In the same interview Suresh Ganapathy of Macquarie Capital Securities said that the near-term impact on banks has been exaggerated. The CASA deposits which saw a surge of 90 percent was anyway supposed to go, he said, adding that the market was unnecessarily euphoric about banks’ swelling deposits.

He estimates that the annual impact to be around Rs 18000-19000 crore. The problem is there is a momentary impact of a month or so. The eventual impact would be of Rs 1500 crore per month.Below is the verbatim transcript of Ananth Narayan and Suresh Ganapathy’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.Latha: Some water has flowed between your speaking to me yesterday and now. Urjit Patel has said that he is waiting for the Market Stabilization Scheme (MSS) bonds permission to come through from the government. Now do you think the bond markets need not worry much?Narayan: I think the words that came in from Urjit Patel were very timely. Given that they clarified that the reason why Reserve Bank of India (RBI) chose Cash Reserve Ratio (CRR), was they didn’t have clarity on the MSS as yet and he has in effect promised to I guess replace the CRR with MSS as and when that tool becomes available once the government sorts the issues out.I think the market now will operate under the assumption that the market will continue to remain under liquidity excess, that we don’t have any more shocks coming in terms of more CRR hikes accompanied by parallel MSS issuances as well. So, the long standing April liquidity framework of liquidity neutrality is no longer valid. The market will assume that we will remain on liquidity surplus for a while now.That if you combine with everything else which is going around the system, you have lack of credit off take, there is a definite slowdown for this quarter in terms of economic activity, there is surplus deposits lying with banks, which will chase bond and assets and of course the overall context on inflation, etc, which we will get as a result of the slowdown, it does make for bullish signal for bonds. You might see a bit of a correction today to start with; that correction could be a lot less than what we had expected 24 hours ago, maybe 5-10 basis points. However, that should be short-lived and you should see people jumping and using this opportunity to buy up more bonds as and when there is a correction.Anuj: You are saying that there is no way that Indian bonds are in a bubble and in fact yields would head lower and there would be buying maybe today and tomorrow?Narayan: Purely from a demand supply perspective, there will be demand for bonds. If you have so much of deposit accretion happening to banks and if you have liquidity remaining in substantial surplus -- let us not forget that we are going to see liquidity increase over the next few days as well as fresh old currency notes come into the system and given that there is a lack of deployment avenues, irrespective of what the underlying economic fundamentals look like, there is going to be a demand for bonds.Now, if this is indeed short-term, of course there will be demand for short-term bonds rather than the 10-year or 30-year bond. However, nevertheless, across the board we will see demand coming through. I think what will be useful from my perspective is a clarification perhaps at the credit policy day that we have moved away from the paradigm of liquidity neutrality to one of now surplus to continue for a while and that is the operating assumption under which bonds will continue to rally.Sonia: Once the MSS bonds come into play then the CRR move maybe retracted but up until then, what do you see as the very near term impact on banks, both PSU and private?Ganapathy: The impact, both on the positive as well as on the negative side, is getting exaggerated in my view. Anyways these Current Account, Savings Account (CASA) deposits which came into the banks as per the State Bank of India (SBI) Chairperson, 90 percent was anyways supposed to go out. So, clearly the market was unnecessarily euphoric on some of these public sector banks.Now, what has happened is that at the margin clearly the liquidity gets impacted and of course the PSU bank deposits or rather the entire banking system deposits to the extent of Rs 3.5 lakh crore needs to be parked with RBI. However, the impact which we were floating at around Rs 18,000-19,000 crore is the annual impact; that is 6 percent on Rs 3 lakh crore assuming the entire 6 percent is paid over the year. The problem here is this is only going to be a momentary impact of a month or so.So, in that sense, the eventual impact if you divide by 12 is only Rs 1,500 crore per month. So, the impact is pretty limited and not very significant the way people are getting carried away looking at this particular measure. So, in my view, yes, at the margin, it is negative but then it is not hugely negative as some people portrait it out to be.Latha: If you have to separate it out, would the impact be a little more on banks like Kotak Mahindra Bank, Yes Bank, I mean banks which were raising a lot of money at 6 percent and had very little savings impact if you have to look at the near-term impact?Ganapathy: What has happened is that money is fungible, so, if you look at it, some people argue they would have raised money at 7 percent, those would be the fixed deposits (FD) rates when they raised in September but at the end of the day couple of weeks later when you have to maintain the balance, you would have anyways landed up getting Rs 7-9 lakh crore. So, that money which was anyways suppose to be deployed under the reverse repo or for that matter government securities (G-sec) gets transferred to the RBI at no interest cost.So, I don’t think we can differentiate between privates getting more impacted or public sector banks getting more impacted; the liquidity is going to abundant both in public as well as private sector banks. The impact from a stock price perspective could be more on public sector banks than private sector banks because the public sector banks had rallied 15 percent post demonetisation, so, to that extent there has to be some correction in them because of this negative development.Anuj: That was my next question, the PSU bank rally, the only sector which has rallied post demonetisation. Do you see that coming to a halt completely or do you think maybe after two or three day hiccup that rally would resume?Ganapathy: If you look at it, in the interim, clearly there is expected to be a correction or rather maybe rally coming to a halt and perhaps you can see 10-15 percent correction in public sector banks in my opinion over the course of next one month or so. This is not only because of the RBI move, it is also because of the fact that the market will realise in couple of months time that majority of deposits are not sustainable and they are going to go out from the system.So, clearly the eventual benefits that is going to accrue to the system is going to be far lower than what the market had earlier anticipated. So, to that extent, clearly the 15 percent move should be retraced in my opinion in couple of month’s time.Sonia: If the RBI does extend these measures beyond December 9, how much do you think that could limit the transmission of rates or further cut in lending rates by banks?Narayan: Anything which is drawn out by way of CRR clearly impedes transmission. Of course as a banker I am biased in this whole process simply because the rate that you get is zero and to the extent that whatever cost you have raised the deposit at goes to the RBI and gets deployed at zero, it adds to the overall cost of funds for the bank and therefore for its clients.To the extent that CRR gets replaced by MSS, there is definite relief because you do start to earn at least market bond yields for the extent of the MSS deployment. What we are hoping for is, yes, there could be more measures required particularly as you see more deposits accruing till the end of December. What we are hoping is these will be in the form of MSS and these will be in the form of MSS replacing CRR with the overall liquidity remaining in excess in which case transmission should continue reasonably well. As it is banks are going around looking for clients to lend money to given that they are sitting with surplus cash at the moment.