The Hindu Business Line : Bankers see some movement in interest rates in near term

“The Reserve Bank of India has kept policy rates unchanged which is in line with our expectations. The key drivers of the policy continue to be maintenance of price stability, while supporting growth. It is clear that domestic factors such as inflationary pressures and liquidity concerns weigh in significantly, with a watchful eye kept on international developments.

No change in policy rates indicate an endorsement that India’s inherent growth drivers are performing well.”

Mr M.V. Nair, Chairman and Managing Director, Union Bank of India

The statement is on expected lines in view of concerns on inflationary pressures. But the RBI Governor has surprised one and all by maintaining status-quo and not altering any of the key rates. There was a bit of disappointment initially. Though world economies are going through troubled times, India is to a great extent insulated against external shocks. Keeping in view the current assessment of the economy including the outlook for growth and inflation, there may be some movement in interest rates structure in the near term.

Mr Mohan Shenoi, Head - Treasury, Kotak Mahindra Bank

“In the last three reviews of monetary policy of the RBI, the focus has clearly shifted from interest rates to liquidity management. Successive MSS auctions and intermittent CRR hikes have kept liquidity on the tighter side.

Market participants are, therefore, pricing term deposits and loans assuming the repo rate (7.75 per cent) to be the operative rate. In my view, banks would lower rates on deposits and loans only if the liquidity in the system remains comfortable for prolonged period of time and they are convinced that operative rate is the reverse repo rate (6 per cent). In the coming months the bid-offer spread between reverse repo and repo rate which is currently at 175 basis points will have to be progressively reduced to 100 basis points if banks have to reduce deposit and lending rates”.

Mr Bhaskar Ghose, Managing Director & CEO, IndusInd Bank

Dr Y.V. Reddy’s move in keeping interest rates unchanged during the third quarter Monetary Policy Review for 2007-08 has succeeded in taking the market by surprise. Clearly, the RBI’s concern on inflation remains paramount, with fears that food and oil prices have the capacity to send price levels soaring. For this reason, a CRR hike before the Annual Policy Statement for 2008-09 (due on April 29, 2008) cannot be ruled out.

At the same time, however, with the Fed Reserve expected to cut rates further in the near future, the Reserve Bank may also be under pressure to reduce interest rates in the next few months.

The RBI has provided a sufficient number of explicit hints that it expects banks to voluntarily reduce interest rates on both deposits and loans – despite having itself kept a rate cut in abeyance.

An outcome of this may be the avoidance of the mad scramble to raise year-end deposits at uneconomically-high rates.

However, it is unlikely that banks will lead the way in reducing lending rates in general, unless deposit rates first show a downward trend.

The RBI has also expressed its concern about the large unhedged foreign exchange exposure of the banking system, particularly in view of recent international financial developments.

We, therefore, expect tighter monitoring from the Reserve Bank on this front.

The RBI has also emphasised the need for banks to enhance credit delivery to “employment-intensive” sectors.

This is an encouraging statement for our bank, given its focus on SMEs and road transport operators.

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