US downgrade on expected lines; no need to panic: IBA

Ratings agency Standard & Poor's downgrade of the US was on expected lines considering events that preceded it and there is no need to panic over the development, the Indian Banks' Association said on Wednesday.

“I don't think immediately there is any need to panic as far as the US downgrade is concerned because primarily I think that this was a thing which was expected to happen, going by whatever we have seen in recent times,” said Mr M. D. Mallya, Chairman of IBA, the head of the umbrella body of the country's banks.

Mr Mallya, also the Chairman and Managing Director of state-run Bank of Baroda, told newspersons that the downgrade was only a “validation” of the expectations of bankers.

The US administration had difficulty in getting a bill — meant to facilitate raising of the country's borrowing limit and avert a possible default on debt — passed in Senate, prior to its downgrade after market hours on Friday.

Widespread apprehension

There was widespread apprehension about the impact on India after the US was downgraded to AA+ from the top-notch AAA rating by S&P. To assuage the markets, the Reserve Bank also came out with a statement before the start of trading on Monday.

The RBI said it is closely monitoring all key indicators and will continuously assess the impact of global developments on the rupee and forex liquidity, and macroeconomic stability.

It added that any development will be met with a quick and appropriate response.

The bankers were speaking after Maharashtra's State Level Banking Committee meeting, held at the RBI headquarters on the eve of the RBI board meeting in Mumbai on Thursday.

Union Bank of India CMD, Mr M. V. Nair, said the changing global scenario can have an impact on export-focussed industries on account of change in overseas demand.

“There will be some units which may have an export obligation; they may have commodity-related business dealings, which can have an impact. One has to wait and watch,” he said.

On widespread expectations that the Reserve Bank will take a pause in its rate hiking cycle, Bank of India CMD, Mr Alok Misra, said the RBI will have to consider the “larger picture” of developments at the global stage, though inflation remains a concern.

“You can't attack one thing (inflation) and miss the larger picture. The larger picture at this point of time is the world economic scenario that is emerging,” Mr Misra said.

Inflation focus

Mr Mallya, however, said that the RBI will continue with its anti-inflationary stance which has seen it raise rates a record 11 times since March 2010 by 325 bps.

“The RBI has been very clear that the major thing it would like to focus on is (to bring) inflation under control. That policy from the RBI point of view will continue.”

The headline inflation number stood at 9.44 per cent for June. Mr Nair said the UBI's internal assessment is that lending rates in the system have peaked.

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