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Surprise rate cut seen; RBI may slash SLR, HTM: Experts

In an interview to CNBC-TV18, SL Bansal, CMD, Oriental Bank of Commerce and Ashish Parthasarthy, Head Treasurer, HDFC Bank shared their expectations from the Reserve Bank of India (RBI) monetary policy schedules on September 30.

While most market experts and economist don’t see an interest rate cut anytime soon, Bansal hopes for some rate cut by the RBI on Tuesday, but adds that banks may not pass it to customers for a month at least. “Why there should be a rate cut beacuse all numbers favourable. Current account deficit (CAD) and commodity prices have come down substantially especially crude prices, so if you cannot cut now, it will be very difficult for you to take a call subsequently,” he says.

Meanwhile, Parthasarthy expects the central bank to oblige the market with a statutory liquidity ratio (SLR) and held-to-maturity (HTM) cut. He further adds that if these two rates cut come through then the bond yields reaction will be temporary. However, Bansal feels that cut in SLR won’t have much impact.

According to CNBC-TV18 poll , twenty percent respondents expect the first rate cut will come in 2014; 10 percent said first half of 2015, 40 percent said in the June-September quarter of 2015. Thirty percent said no cut at all till October 2015 i.e. for a year from now.

Below is the verbatim transcript of Ashish Parthasarthy and SL Bansal’s interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.

Latha: Are you expecting an statutory liquidity ratio (SLR) and an held-to-maturity (HTM) cut?

Bansal: What I believe is there should be a rate cut. I am not with 100 percent view as fas as the poll that you have conducted is concerned. Why there should be a rate cut beacuse all numbers are favourable. Current account deficit (CAD) and commodity prices have come down substantially especially crude prices, so if you cannot cut now, it will be very difficult for you to take a call subsequently.

Second thing is, let us see whether there should be a rate cut — I think there should be a rate cut but whether the rate cut is going to happen to my mind, it may not, 90 percent is no but knowing governor closely, I believe that he may bring a surprise and there maybe some rate cut. Whether the rate cut will be passed on to the customer? I believe no. For the next 30 days, it will be a big no but for the first time one good thing has happened.

During the last three years, there was always a mad rush for raising bulk deposits at the quarterly closing for the first time, this quarter, there was no rush for raising bulk deposits and the deposit was available at close to normal deposit rates of 9 percent for one year. This is a healthy sign and now that the governor can take a risk, slight cut in to the repo rate of 25 bps although it will not translate into cut in the lending rates immediately, it will provide a big positive to the market as well as to the ultimate consumers.

Reema: Despite the slightly better than expected borrowing figure, the bond yields are going into the event a bit cautious. Right now as we speak it has inched up to 8.46 versus 8.44 on Friday. What is the bond market expectation particularly with respect to SLR as well as HTM, what is it pricing in?

Parthasarthy: The consensus expectation on the rate is that there will be no change and no change for quite some time. So if you have the overnight rate at around 8 percent, 10-year at 8.40-8.45 seems to be fairly priced unless you expect rate cuts in the near future.

Secondly, there is a reasonably majority expectations that there will be in SLR cut and I am of the view that if there is an SLR cut, the HTM cut will be simultaneous. So whenever there is a half a percent SLR cut, you will have an additional HTM cut of half a percent equal. So, that is what the bond markets are pricing in and that is why before the policy, you see the market players being cautious.

Latha: That was why I was asking about SLR and HTM first. Will life get tougher for banks if there was an SLR cut and an HTM cut, what will be the impact on your own profit and loss (P&L)?

Bansal: If there is SLR cut, it is not going to impact much because most of the banks are holding close to 27 percent. Today there is not much demand on the credit side somwhere we are going to park our funds. It will not make life easier. Only thing is if the bond yields come down then naturally we can gain something on the treasury front and provide substantially from the provisions of the NPL. Our life is going to be very tough in today’s environment when I think this coal block decision is going to affect the bank’s balance sheet in a big way going forward from 6-9 months time. I don’t know when we are going to see better days ahead.

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