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

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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.

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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.

Latha: You expect that in this quarter itself that is October-December quarter you should see an uptick in NPLs because of this coal block thing but more importantly if you can answer my question on HTM if the HTM were cut, a little more provisioning will be called for you think?

Bansal: I don’t think it will affect the bank balance sheet much but of course one thing will happen if the liquidity is available in the system and I have got only two options either not to raise deposits or to lend to the riskier assets. In today’s environment, the system is not conducive to lend for the so to say productive assets. We need to wait and watch of course busy season is coming and there will be a lot of demand for the retail assets. Now the bank for the next three-six months should lend only for these segments agriculture and retail sectors. For big corporates, I would not like to venture into that field.

Latha: I am asking you specifically sir, if there is a half a percent HTM cut, will your provisioning rise only on account of that?

Bansal: Specifically for OBC not much.

Latha: For the system as a whole, how much do you think could be the burden of the coal allocation or for that matter for OBC itself? You said nine months would still be tensed months, what do you expect is the impact on your balance sheet on your P&L?

Bansal: There are three-four aspects in this. Number one is honourable Supreme Court has permitted all these producers to continue the mining up to March 2015. But they need to provide some penalties Rs 295 per tonne and that amount is roughly about Rs 9,000 crore. All these companies will approach the banks to asking for funding of these penalties. This will be additional burden on the promoter as well as the banker and all these power producers ultimately DISCOM then metal companies, they will be affected.

You cannot work out the cost right away ultimately it depends on the policies of the government whether they will bring out some preferential allotment for the existing producer or they will go simply by the auction mode, it is to be seen what policy government is going to adopt and to what extent the existing manufacturers will be suffering and what type of new player will come in. Most of the people have invested a lot of money in these existing 40 coal blocks, which are operative and it is to be seen, how it will span out.

Reema: You said that you expect an SLR as well as HTM cut at the same time. If it happens tomorrow, how much further could the yields rise?

Parthasarthy: I think any response to that will be temporary. It could go up to anywhere between 5 and 10 bps. That is about it. Even though these changes are happening and there is a clear roadmap that SLR will be brought down and so will be the HTM. Firstly at this point in time, credit growth is very anaemic and so there will remain some amount of demand for SLR bonds from the banking system.

Secondly, as the SLR comes down, the liquidity coverage ratio (LCR) requirement of banks will continue to go up. So they need to hold liquid assets and lot of it would be in government securities. The total holding of government bonds by the banking system in terms of their percentage to the demand and time liabilities (DTL) is unlikely to come down. So that demand will remain.

If you see the investor sentiment towards India is extremely positive so you have seen lot of overseas portfolio interest in the debt side in the government bonds and that is again likely to continue.

Thirdly, there is a reasonably large demand and which is likely to increase from entities like pension and provident funds which you see pan out over the next six-twelve months. So demand for bonds, I don’t think will be an issue.

Latha: What do you watch out for in the language? Everybody was terrified with those couple of sentences that the governor said last time, one that there is still upside risk to that 6 percent inflation of January as well he has repeatedly said let us fight and win this battle against inflation once and for all. What will you watch out for, do you expect him to repeat both these sentences, what will be the impact on the psyche of the market?

Parthasarthy: I don’t think his stance will change significantly. There could be some bit of dovishness in the stance but not beyond that marginal dovishness because the stance is extremely clear we want to fight inflation, bring it down to a lower and sustainable level once for all. We have seen whenever there has been a fall in inflation and we have reduced rates, inflation has come back in the economy.

So, we don’t want to repeat that situation again this time. So that stance is unlikely to change if at all there could be some marginal change given the trajectory of inflation, which could be slightly better than what has been forecasted, so there could be a bit of a dovishness otherwise I think the stance remains the same. To add on the LCR bit, at this point in time, I understand that all government bonds are eligible as high quality liquid assets. So it is not only specific bonds.

Latha: I had Reserve Bank of India (RBI) sources telling me that it will be the more liquid ones. State government bonds are not qualifying as LCR is what I was told.You have got a promise that you will be able to ensure that the DISCOMs raised tariffs every year or regularly, pass on their costs. Have you been able to implement that, ensure that tariffs are increased regularly without you lending money to them before that?

Bansal: The rates are going up but it is not as per expectations. Moreso, the important thing is losses are not coming down as it was expected. What was expected by March 2015, there will be no cash losses but still what we see is the cash losses are still there. I don’t know how the things will be addressed going forward, but a lot of improvement has taken place in the DISCOM.

This coal block allocation verdict will act as a body blow to the DISCOM also because there will be pass through effect and naturally the power will become costlier whether they will be able to pass on this excess cost to the ultimate consumer in a democratic set up, it is going to be very difficult. Now, on one side, we are trying to contain the inflation, on the other side the administrative prices will go up. How to address all these issues will be a big worry for most of the state government also.