The Hindu Business Line : ‘Assurance on govt borrowing programme comforting’

Mumbai, April 21 The cut in key interest rates by 25 basis points, together with the assurance by the Reserve Bank of India Governor that the additional government borrowing programme will be managed without putting pressure on bond yields and liquidity, should encourage banks to cut both lending and deposit rates.

Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said “The way the indication has been given by both the policy rates coming down by 25 basis points and the assurance that liquidity will be managed through the open market operations without impacting the yield curve, gives comfort to banks.”

Mr M.D. Mallya, Chairman and Managing Director, Bank of Baroda, said, “The RBI has clearly stipulated how exactly they would be managing government borrowing. There were concerns about the additional government borrowing, but that concern has been adequately addressed. The RBI has indicated that in the first six months the net inflows of government securities into the market would be to the tune of roughly Rs 82,000 crore, against Rs 67,000 crore last year, which is not too high. Therefore, concerns with regard to management of liquidity and government borrowing have been appropriately articulated.”

Mr Nair said that as a result of government borrowing, one worry was whether interest rates would go up after six months and to what extent. But, now, even deposit rates can be brought down, he said.

“My sense is that over a one-year period rates could come down by 75-100 basis points,” he said.

Mr Mallya also said that RBI has given a guidance that interest rates are on a downward bias. Banks will cut rates depending on the overall macro-economic situation, liquidity and inflation, he added.

Lower cost of funds

According to Mr Abizer Diwanji, National Industry Director, Financial Services, KPMG, the rate cuts were not expected because they were not warranted as banks are flush with liquidity. However, the cut in the repo rate (the rate at which banks can borrow from RBI) will lower the cost of funds for banks marginally, he pointed out.

“This is a general signal by RBI to lower interest rates. But banks see a particular risk in lending to coporates because of their weak cash flows. Unless there is a revival in business, commercial lending to corporates will be difficult. What the RBI and the government need to do is to make it attractive for banks to lend to corporates,” he said.

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