A rate cut after five years and the ring of it is great. Now, if a 25 bps rate cut has been done, what does that mean?
Dinesh Kumar Khara: Well, it is a very clear reflection in terms of the inflation trajectory because as far as RBI monetary policy is concerned, we have been having inflation targeting as one of the core principles and it very clearly reflects that inflation is under tolerable band and that is why this kind of interest rate cut policy rate has been announced today.
So, it is a broad direction to the market and how much of that will eventually get passed on will be a function of the cost of funds for each of the bank and before that I would also like to highlight that some of the loan book, I mean some of the components of the loan book are linked to the external benchmark, but those external benchmark if at all they happens to be the repo rate, then perhaps it will have immediate transmission.
But if that external benchmark happens to be the MCLR, then how much this interest rate cut will have an impact on the MCLR will probably decide the likely transmission of this interest rate cut – that is how I read it.
The other aspect is that the cost of funds for the bank is a function of the cost of deposit that happens to be the major source for any bank to operate and we have seen that in the past the cost of deposits have actually gone up significantly which is also a function of the liquidity status in the market.
So, considering the fact that the loan growth was outpacing the deposit growth and many of the banks had gone into the trajectory of about 80% odd credit deposit ratio, some had gone even as high as 90-95% also, so naturally the market had seen some such players who were clamouring for deposit at any cost so that actually led to a scenario where the market interest rate at least for the deposit went up significantly. So, the ability of the bank to pass on will depend upon the composition of the portfolio, and the benchmark which they have adopted for the variable rates or the floating rates loan book, so that is what my overall sense is.Where the transmission is slightly more active, is it with private banks, is it with PSU banks, is it with large banks, where the transmission is highest and fastest?
Dinesh Kumar Khara: As I mentioned, if at all, banks have adopted the repo as their external benchmark, there it will be the fastest, there the transmission is going to be the fastest. They may not be in a position to reprice their deposits immediately because deposits will get repriced with a lag.
The loan book, if at all linked to the repo, will get repriced immediately and deposit in any case, the fresh deposit whichever is coming and if at all this kind of a reduction in policy rate will have an impact on the overall interest rate scenario in the market which to my mind is only one factor when it comes to the repo rate.
The other very important factor is the market’s liquidity status. That will be the deciding factor.
Will we see an immediate cut in deposit rates because of this RBI rate cut?
Dinesh Kumar Khara: Not necessarily. As I mentioned, if at all there is a challenge in the liability composition of various banks, they have to address that gap and they might continue to pay even a little higher to mobilise those deposits.
How will RBI’s 25 bps rate cut help the economy? I am asking very basic questions because if the transmission does not happen and depends on the banks and what policy in terms of MCLR and cost of liability is, if deposit rates do not just come down, do you think 25 bps is just a signalling and it may not really have a large impact?
Dinesh Kumar Khara: It is very important as far as the signalling is concerned and the way I read it, of course, MCLR will also at some point of time will start really readjusting to this changed reality and with that particularly the way I look at it is, it will get passed on to, particularly for the SMEs in particular, their loans were required to be linked to the external benchmark and majority of the banks have got their MCLR as the external benchmark and which means that for the NBFCs, etc, which happens to be into the SME bracket and so will have the benefit of the lower interest rate.
Maybe it might differ from three to six months, depending upon each of the banks when they will start factoring in this impact in their MCLR interest rate. It would actually enable these NBFCs to borrow at a little lower interest rate from the banks which eventually means that at the ground level the interest rate might come down, so that is the sense which I get.
The Governor’s comments on liquidity and a specific comment that “we are there to ensure enough and more liquidity is there in the system, apart from just providing overnight liquidity,” we will also give other forms of liquidity. Is that a good enough message for markets to breathe a sigh of relief?
Dinesh Kumar Khara: It is a very welcome message. Well, of course, the fact remains that when it comes to as far as the banks are concerned, they would have been probably looking at the reduction in some kind of a CRR and with the reduction in CRR, the pre-emptions would have got reduced and the lendable resources would have gone up for the banking system also.
But today, by virtue of the statements which have been given by Governor RBI in terms of easing of the liquidity both the durable liquidity also where he has indicated that there will be enough durable liquidity. In a way, he has sort of indicated that the call money market – where the participants are not really coming with full vigour and probably the depth of the call money market is not seen as much as it should be – is something which will really help in cooling down the call money market in the days to come and again raising through repo and lending through in the call money market which was apprehended to be a cause of concern for many of the banks even that is attempted to be addressed through this process.
Of course, TREPS happens to be the secure market whereas the call money market is unsecure, but at the same time, there are many more players in TREPS and also the banking system and now the size of the other players have also gone up significantly. The banking system is 200 odd trillion as far as deposits are concerned and similarly, mutual funds would be about 70 trillion; likewise insurance would be around the same level. That means that as compared to that in the call money market, it is only the banks which are playing, so naturally the depth being very low in case of call money market, is one of the reasons why the call money rates invariably are on the higher side.
So, that is one aspect which is intended to be addressed by the RBI Governor and the call money market is a very important source to address the short-term liquidity for the banking system. So, people should make use of that, that is intended.
There are two ways to stimulate the economy – fiscal and monetary. The government has supported the economy on the fiscal side with a huge tax cut. The Reserve Bank of India is opening the liquidity tap and is also loosening the monetary, the interest rate cycle. Can I say that these interventions in a sense will ensure that the economy which has gone off track – 7.5% growth rate has become 6.5%, could soon be above 7%?
Dinesh Kumar Khara: There are a couple of more explanations which have been given by the Honourable Governor in the press meet today. One is essentially relating to the LCR, the other one is relating to ECL provisioning, and the third one is relating to the project loans provisioning.
When it comes to the growth initiatives of the economy, even these measures matter quite a lot. That has also brought in some kind of overhang on the minds of bankers when it comes to LCR, when it comes to ECL, when it comes to project finance provisioning. So, at least that has been taken away and also it has been indicated that there is going to be enough exchange of ideas between the banks and the regulator, regulated entity and the regulator, and after that these guidelines will be tweaked or will be sort of initiated into the system.
So, even that is going to work very well because otherwise, if at all while when it comes to lending, if at all bank is required to make 5% provision maybe in three years’ time, so naturally the cost at which they can lend, it will automatically go up now at least with some kind of a reassurance from the Honourable Governor, these aspects will probably also get addressed.
Also, the LCR aspect which eventually has an impact on the cost of funds, will also get addressed. So, apart from the reduction in the policy rate, even these initiatives will go a long way in creating a favourable environment for encouraging growth in the economy.
