RBI Monetary Policy: Bank of Baroda chief sees limited scope for rate cut

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Ahead of Reserve Bank of India’s Monetary Policy Committee meet on February 7-8, the first since Budget 2017, the market is hoping for an interest rate cut to spur demand and push credit growth.

There is an expectation of a reduction in interest rate, said PS Jayakumar, Managing Director and Chief Executive of Bank of Baroda

. “I would say banks have transmitted the cost of funds reduction at this point of time. And therefore further avenue for further reduction in interest rates seems less likely. We will wait for the monetary policy,” he said.

Commenting on whether banks will pass on the benefits of the potential rate cut to its customers, Jayakumar said banks have transmitted cost of fund reduction and at this point, further avenue for reduction in interest rates is less likely.

Below is the transcript of PS Jayakumar’s interview to Latha Venkatesh on CNBC-TV18.

Q: What do you think about the upcoming monetary policy? Do you think we can see a rate cut?

A: The Budget and the contained fiscal deficit is a positive thing, inflation being lower is a positive thing. So, the expectation of rate cut is there, but I would say banks have transmitted the cost of funds reduction at this point of time. And therefore further avenue for further reduction in interest rates seems less likely. We will wait for the monetary policy.

Q: Would you wait for the monetary policy or would you wait to know how much of your own extra deposits will stay. In any case, what is you expectation? How much will stay you think?

A: Difficult to say, but you are right. It is going to depend upon how much of those deposits stay. It is also another variable should we reduce the savings deposit rates by themselves. So, a couple of questions around that. We need some more data for that to flow out.

Q: So, you do think that there is scope for deposits to fall further because you are saddled with cash?

A: Some of the deposits are returning from the system. By no means we have reached a point where we could see stability. Let us wait and watch. The expectation varies from 40 percent of the money being retained to 70 percent of the money being retained. But I am more half way there as what I think would be there. So, let us wait for it.

Q: If there is a cut, for instance from the RBI, you think banks will immediately not pass it on? You would rather wait to see the stability of deposits?

A: At this point of time, we are more than fairly priced. If the monetary policy also results concomitantly in the reduction of cost of funds, surely yes. So, we have to wait and watch that.

Q: What is the sense you are getting of the market? Even the market topped at 6.1 percent, the 10-year and then it rebounded all the way to 6.4 percent. Will bonds also bypass rate cut, if it came? You will not see too much of a movement in the 10-year?

A: A couple of other things, the externalities also has to be kept in mind, the potential rising US dollar interest rate. All of that is a factor, foreign institutional investor (FII) funds and the way they move. So, supply side is affected by a number of things. So, at this point of time, it is kind of range bound. Probably there are no significant downside risk, but we are where we are and it is probably going to be there for some time.

Q: A word more on the demonetisation and the munificence that RBI granted, forbearance if you please, that you do not have to classify as non-performing assets (NPA), loans under Rs 1 crore, even if they are not returned. What is the sense you are getting, not for your bank at all, but for the industry as a whole? Do you think it will leave behind some debris of bad loans?

A: The forbearance are not uncommo1n in unusual circumstances such as earthquake, any kind of other kind of war, it can be any of these things. But also, in a consumer behaviour sense also, asking for 11 instalments instead of 12, extending the loan, I do not think is necessarily a bad thing. But, I do not have data to say this is how it will behave, but I would think as long as the currency circulation starts, as long as the economic activity revives, I do not see why the behaviour should be any different than what it was before. So on the balance, yes, optimistic.