Hinting at another round of interest rate cuts, private sector lender HDFC Bank’s Managing Director Aditya Puri today said most banks will cut their lending rates by the end of the week.
“I think you should definitely see a reduction in base rates by most banks by Friday or thereabouts because most of them have also dropped their deposit rates,” Puri told PTI.
He, however, refused to divulge his own bank’s strategy or specify when its asset liability committee, which decides on rates, is meeting.
Finance Minister Arun Jaitley is meeting heads of the 27 state-run banks on Friday.
“The trigger is the reduction in rate by the RBI, loan demand being weak and lots of liquidity,” he said, specifying the reasons which will prompt fresh round of base rate cuts.
After RBI Governor Raghuram Rajan’s tough talk in April, HDFC Bank had joined competition and announced a rate cut of 0.15 per cent.
The RBI had cut its key rate by 0.25 per cent in the policy announcement last week and only SBI has reacted by announcing a rate cut of 15 bps to 9.7 per cent.
Puri acknowledged that the stance of competition in a market where everybody is vying for customers plays a part in cutting lending rates, along with the rates in competing money market instruments like certificate of deposits.
Even though a majority of banks had cut their lending rates following the RBI Governor’s April tough talk, where he called the bank’s posturing as nonsensical, Rajan had last week rued that banks are not doing enough, pointing out that the pace of deposit rate cuts has been faster.
“If I look at the bank fixed deposits, because that is the only thing I can invest in, the rate has come down by one percentage point to 8 per cent. Over time, this has to be passed through to the lending side,” Rajan had said on June 2.
Puri further said that RBI would always feel the need for a faster transmission, but pointed out that banks also have their compulsions as most of their liabilities come from deposits.
“The RBI would want faster transmission and I can understand their point of view, but the banks also have a point of view. As the system becomes more sophisticated, transmission will be faster,” he said.
Even though many industry observers have put question marks over more rate cuts by the RBI, given the hawkish commentary on June 2, when he had said the central bank had chosen to “err” a bit to support growth and also hiked the January inflation target by 20 bps to 6 per cent, Puri said he sees rate cuts of up to 0.75 per cent by March.
Puri also discounted the looming threat of a shortfall in monsoon, saying worries around rains are highly over-stated and pointed out that the rainfall estimated this year will be higher than what we witnessed last year, where the government and RBI had ensured least impact on inflation.
Moreover, pockets in the Northwest, where the IMD expects a deficient rainfall, are also well irrigated, he said.
“The Governor had in no stage said there will be no further rate cuts. All he said is ‘I’ve front-loaded the rate cut even though there are some uncertainties including the monsoons… may be I’m a bit more optimistic and the Governor has to be conservative,” Puri said.
Stating that inflation will not breach the 5.5 per cent mark, he said the RBI’s guidance of maintaining the real rate of interest in the 1.5-2 per cent band will give it the room to cut the repo rate by the 0.50-0.75 per cent.
“I do feel if inflation and fiscal deficit are maintained and if oil prices don’t shoot up, I think you have the scope for the 50-75 bps cut more,” he said.
He also said that the banks will pass on the benefits accruing from all three rate cuts to its borrowers as and when the RBI acts.
Puri said the sound management on the fiscal and current account side will ensure that there is no adverse impact of a possible rate hike by the US Federal Reserve.