The Reserve Bank of India (RBI) in its credit policy review today has kept key rates unchanged only cutting statutory liquidity ratio (SLR) from 25% to 24% with effect from December 18, 2010 to January 28, 2011.
The central bank has paused in raising rates after six increases since March but warned that the risk in its inflation outlook is to the upside and unveiled steps to address persistently tight liquidity.
RBI would also conduct open market operation (OMO) auctions for purchase of government securities for an aggregate amount of Rs 48,000 crore in the next one month.
In an interview to CNBC-TV18’s Latha Venkatesh, Mohan Shenoi (Treasurer, Kotak Mahindra Bank), Shailendra Bhandari (MD and CEO, ING Vysya Bank), B A Prabhakar (ED, Bank of India) and Hemant Mishr (Head Global Markets South Asia, Standard Chartered Bank) gave their perspective on RBI’s policy.
According to Prabhakar, a rate hike in the January policy is unlikely but liquidity may remain tight till March. However, he said that if liquidity is going to be tight, then banks will have to increase the deposit rate and the deposit mobilization has been very slow. “Naturally the banks will have to meet their deposit targets,” he added.
According to him, we will see pressure on deposit rates which with a lag effect may have to be passed on. It may not be immediate but it maybe passed on with a lag effect, he reiterated.
Shailendra Bhandari, MD and CEO, ING Vysya Bank agrees that as long there is possible hinted objective of the Reserve Bank to reduce some of the interest margins we are going to see banks being aggressive on deposits passing on the cost through the lending rates especially the base rate but with a lag.
Bhandari explains, “To start with the base rate it is essentially formula driven and banks have been given time up to December 31 in which they can change the formula. But from January 1 onwards they are suppose to face the formula. Now the formula basically builds up on the deposit cost as on risk cost as on reserves and on a profit margin and then you translate that into a base rate. If you look at the deposit rates and when people ask to revise the base rate – do you have some banks who are around 9% but you have a lot of the large banks to still have base rates around 7.5%. When we did those rates deposit rates systematically any thing from 50 to150 basis points lower than what they are now you could actually argue that even higher because if you take the CD rates which are currently 9.5% for one year that is a lot higher than the official deposit rates which are around 7.5 to 8%. If you look merely the base rate there is an argument that there should be a substantial one time revision probably in January itself unless people decide to change the formula.”
Mohan Shenoi, Treasurer, Kotak Mahindra Bank is concerned that another 25 to 50 basis point hike is possible. According to him, the anti inflationary stance of monetary policy will continue throughout remaining part of this fiscal. “As we go along since the liquidity will still be in the deficit zone and not in the surplus zone. There are policy rate hikes expected up to March this year. I would feel there will be increases in base rates as we go along in the rest of this fiscal,” he added.
According to Hemant Mishr, Head Global Markets South Asia, Standard Chartered Bank, investors should it positively for the reason that somewhere at the back of the RBI’s mind when they got that number down from 25% to 24% they would have considered the gross bowering number for the next year and they still think that at 24% that can go through.
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