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Expect RBI policy rate near 7% in 3-4 quarters: Axis Bank

With the unexpected cut in repo rate, there are murmurs that RBI’s monetary easing stance is likley to continue. V Srinivasan executive Director, Corporate Banking at  Axis Bank says the stance will be maintained for next 6-8 quarters with policy rates nearing 7 percent in next 3-4 quarters.

Speaking to CNBC-TV18, Srinivasan says bond yields will soften by 50-77 bps, but deposit rates can’t match the fall. Despite RBI notification on Monday, banks have not been able to lower deposit rates or base rate, which was expected post the policy rate cut. ‘Base rate cut will depend on deposit rate behaviour,” Srinivasan said while speaking to Adrian Mowat, JP Morgan’s Chief Asian & Emerging Equity Strategist on CNBC-TV18.

Below is the transcript of V Srinivasan & Adrian Mowat’s interview on CNBC-TV18.

Mowat: As we are on the subjects of interest rates coming down, what is your expectation for how low rates could move in India?

Srinivasan: We need to look at it from two dimensions. One if you look at market oriented rates which is said as risk free rate in terms of the government securities as well as corporate bonds, that is been pricing in rate cuts for some months now. The rate cut is just a reinforcement considering that the governor had said he would start cutting until he is convinced there is no looking back. This monitory easing stance is likely to continue for the next at least 6-8 quarters. We are looking at rates going much lower at least on the capital market side that is bonds whether it is a government securities or corporate bonds.

In terms of deposit rate itself, it is a function of overall demand. If you look at the quarter we are in, which is Q4, you are looking at credit offtake being a lot higher. You are looking at some regulations which are come in terms of liquidity coverage ratio (LCR) and other issues which have been effective through this quarter. So you are looking at deposit rates, possibly not coming down on the same pace as bonds, at least through this quarter. But it should ease. As we go into the new financial year you will see this easing gaining further momentum and lending rates would follow. So, you are looking at overall bond yields going at least another 50-75 basis points lower over the course of this cycle.

CNBC-TV18: When do you see the first base rate cuts by the big boys? One or two smaller banks have cut but the top five, when will you all cut?

Srinivasan: As I said it is a function of cost of funds and we got to see how deposit rates behave. As of now deposit rates have been sticky at levels.

CNBC-TV18: Why aren’t you all cutting deposit rates?

Srinivasan: This is a quarter in which credit off take is higher, bank loans tend to be higher than any of the other previous quarters and therefore need for liquidity for the banks itself is higher. So, it is going to be a function of what is the liquidity in each of the bank and how exactly they are going to finance it.

Mowat: There is concern out that India need to accelerate the pace of deposit growth. Do you think that part of the story here is that it is difficult to push down deposit rates when we will need fair amount of deposit growth in order to have the lending growth that India needs to grow at 7 percent?

Srinivasan: I agree it, if you look at even what the monetary easing is done is if you look at bonds as well as commercial deposits (CDs) their rates are much lower than deposit rates. With the result that you are finding it difficult to borrow through other instruments and deposits tend to be a favour instruments on the part of retail customers and banks need that liquidity and we are trying to make sure our deposit growths keep pace.

The big thing has been that credit growth has been fairly lack luster over the first three quarters and to that extent need for liquidity at deposits has been lower. If that starts ticking up the banks would need the liquidity and deposits growth needs to keep pace with that. In that background where the deposits rates can come off sharply is a mood point.


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