The on Thursday sustained is rate hike in policy rates. The central bank hiked key policy rates by 25 bps. The central bank raised its key lending rate, the repo rate, to 6.75% and its key borrowing rate, the reverse repo rate, to 5.75%. The CRR has been left unchanged. The RBI also raised its inflation forecast for March-end to 8% from 7%.Reserve Bank of India
In an exclusive interview with CNBC-TV18’s Udayan Mukherjee and Mitali Mukherjee, Shailendra Bhandari managing director and CEO of ING Vysya Bank says that RBI’s move is all set to hurt the banking sector. “Banks are going to be under pressure in order to boost deposits,” he says. He believes, “beyond a point there is no use just raising interest rates because in which case they will get passed on through reprising but you do need to see credit coming down.”
He does not expect any major hike in the home loan rates. He further says, “we may see further 50 bps rate hike this year.”
Q: What did you make of what the central bank said?
A: To some extent the projection of inflation for March at 7% was unreal. They have come out with a projection of 8% and I wouldn’t read too much into it. It was a mid-term policy, it’s a course correction, everybody expected the rates to go up by 0.25% and that’s what happened. They also brought out that there are series of pressures in the global economy, some of which are external to India that is hampering growth. We had projected that there would be 100 bps point increase in the rates this year of which roughly half has already happened and they would stick to that unless something completely untoward happens. I do not see any major change on that game plan.
Q: Would you say the high rates that we are living with particularly on the deposit side may also extend well beyond what bankers had earlier expected?
A: The rates have gone up even prior to December, so if you look at one year CD rates they are already gone to 9.5-9.75. This quarter where the lending rates have gone up, the one year CD rates though they briefly crossed 10% have lingered around 9.9. The consensus is that in April-June quarter these will actually come off a bit because there is currently a bit of a pressure on banks to boost up deposits.
Hence, interest rates in terms of deposits will sustain around these levels which is between 9.5 and 10. As of now I see no reason why they should go out and set new highs.
Q: How much translation will you see in the rest of the year from the RBI’s indications or cues for the banking system? If indeed another 50-75 points of hikes are indicated by the RBI, do you think the banks will pass down all of it or do you think they might not do that given how much rates have already gone up in the system?
A: Banks had some catching up to do, so, if I look at the December quarter most banks didn’t actually react and base rates stayed where they were. Hence, even as recently as December, most private sector banks had base rates of around 775 or lower, State Bank was still around 7%. We have seen this time that banks have reacted in a proactive manner. Therefore, even prior to the monetary policy this week and last week some banks did revise rates. So, as an immediate outcome of this particular increase in the repo and reverse repo, other than for some banks that have not aligned their base rates with the market, I don’t see any immediate increase in home loan rates. If all banks do hike rates it will not be because of the rat hike yesterday, rather it will may happen in April or May.
Q: By how much do you think this will impact credit growth? Until now banks were confident because credit growth has not been hit despite rates moving in the direction they have. When do you think this inflation and rate problem will start pinching the credit growth that banks have been eking out?
A: If inflation is to be controlled, consumption has to be controlled and if consumption is controlled credit will down. Beyond a point there is no use just raising interest rates because in which case they will get passed on through reprising but you do need to see credit coming down. Hence, I do believe that it would not be bad for the system if credit from 23-24 came down to maybe 19-20 and that would be part of long-term solution. However, I think there is nothing wrong in a slight moderation in credit growth.