The Hindu Business Line : Bankers expect a drop in rates after a few months

Chennai, Jan. 29 Although the credit policy of the Reserve Bank of India, announced today, does not cue a rate cut, it appears to be a matter of consensus among bankers that interest rates will fall after a few months.

Most bankers that Business Line spoke to today said they expected a softening of both deposit and lending rates from the beginning of next financial year.

They all said that the ‘Third quarter review of Annual Statement on Monetary Policy for 2007-08’ was pretty much on expected lines – status quo was well flagged by the RBI Governor, Mr Y.V. Reddy, in his various speeches in the recent times. However, bankers read a message embedded in the policy statement: reduce interest rates.

Mr V. Santhanaraman, Executive Director, Bank of Baroda, noted that last year around there was a “mad rush for deposits” as banks desired to grow their balance sheets. A few public sector banks were also playing the I-am-bigger game. “The craze has died down,” Mr Santhanaraman said.

Pointing out that the Governor’s statement referred to deposit rates being on the higher side, Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said that deposit rates would have to fall and lending rates would follow suit. “My hunch is that something will happen after Q4,” he said.

Mr M.D. Mallya, Chairman and Managing Director, Bank of Maharashtra, also felt that interest rates would drop “after 2-3 months”.

Better Q4 seen

Many bankers feel that bond yields would start rising, meaning that banks may not have much of an opportunity to sell their bonds and book profits in the rest of the financial year. However, Q4 treasury income may still look better.

This is because many banks have already booked profits when yields fell in the last few days. Yields on the 10-year government securities fell to 7.38 per cent after the US Fed cut interest rates last week but have since hardened by about 15 basis points. Bank of India, for instance, said that it had sold securities when yields were low and made some money.

Secondly, in the fourth quarter of last year, many banks had to provide for depreciation.

“This time, the depreciation issue is not there,” observes Mr B. Sambamurthy, Chairman and Managing Director, Corporation Bank.

Thirdly, many banks expect good gains from their equity portfolio, especially from their investments in the primary markets.

Finally, many bankers, such as Mr Mallya, expect a pick up in credit offtake in the fourth quarter.

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