The Hindu Business Line : Bankers divided over rate outlook

Compelling factors including the sharp fluctuations in inflation along with a tumultuous spell in the domestic debt markets in the recent past have forced banks to reassess their views on which way interest rates are poised to go in the near future.

A section of bankers are of the view that with oil prices ruling precariously high and inflation not showing strong signs of easing, the pressure on domestic interest rates continues to be a serious threat.

Drying up of rupee liquidity in the system and a significant spurt in credit offtake strengthen their argument.

However, at the same time, there are other bankers who are confident that rates will remain stable in the medium term, as there are signs of fresh dollar inflows into the country.

On the sidelines of a conference recently, Mr P.S. Shenoy, Chairman and Managing Director, Bank of Baroda, said that he expected interest rates to remain stable, with a downward bias, over the next three months.

Echoing similar sentiments, an official with another leading public sector bank said: "We are now of the view that the liquidity in the system is still at comfortable levels and is unlikely to dry up soon.

Although the rupee is being supported by the Reserve Bank of India (RBI) against the dollar, there are fresh dollar inflows, which are coming in now after a gap of a couple of months."

He added: "We feel that it's just a matter of time before the RBI starts mopping up excess dollars from the market again, which will generate a corresponding amount of rupee liquidity in the system."

This polarisation in views among bankers assumes significance in the context of most banks bracing themselves to take a knock on their treasury profits for the second quarter of the current fiscal.

A number of them have still not taken advantage of the facility of transferring a portion of their SLR securities to the held to maturity (HTM) category, based on their view that interest rates and bond yields are likely to soften soon.

In early September, the RBI had, as a one-time measure, allowed banks to transfer securities to the HTM category, in an attempt to provide them with some cushion against hardening bond yields.

However, the catch was that banks were required to shift the securities at the market price and thereby take a hit on their portfolios, as the market rates were well below the holding price of the securities.

While a few banks such as Bank of India, Corporation Bank, Allahabad Bank and Andhra Bank are understood to have made the transfer to the HTM, others like Bank of Baroda are of the view that since interest rates and bond yields are likely to stabilise, there is no need for them to make the shift, at least for the time being.

Meanwhile, debt market analysts said that the market would only benefit from the differences in outlook and opinions on interest rates, as it will enable better price discovery.