See reversal of interest rates irrespective of what RBI does: Madan Sabnavis, CARE Ratings

See reversal of interest rates irrespective of what RBI does: Madan Sabnavis, CARE Ratings

I believe that banks should be in a position to take a decision on interest rates irrespective of what the RBI does. 
In a chat with ET Now, Madan Sabnavis, Chief Economist, CARE Ratings, speaks on the RBI policy and rate cuts. Excerpts:

ET Now: We have seen key banks cut deposit rates. The point that there could be a transmission across banks even before the RBI blinks, what is the tendency of that happening before the next credit policy review?

Madan Sabnavis: No, in fact, this is a very interesting development which has taken place because if you look at real impact of, say, the repo rate being cut on in terms of your overall cost of funds, it is a very small amount actually. Therefore, I believe that banks should be in a position to take a decision on interest rates irrespective of what the RBI does.

So today what we are actually seeing is that banks are being guided more by the market forces. When you reach a stage where credit is not picking up and we have surplus funds with them, in fact if we go by the latest WSS of the RBI, it shows that it could be something like 1 lakh crores of surplus liquidity which is there. I am just looking at incremental deposits, incremental credit or incremental investments. So in case you have these kinds of surplus funds, then it makes sense for you to try and cut down on your deposit rates to begin with and probably going ahead, even the lending rates could be cut based on the impact on their base rates.

I would regard it to be a temporary but very positive development because what you all were discussing in case there is a revival in growth in credit, I am quite sure that there would be a reversal of these interest rates irrespective of what the RBI does. But gradually, we should actually learn to move towards what the market warrants rather than wait for policy signals coming from the central bank.

ET Now: You said banks should be able to take their own decisions on interest rates regardless of what the RBI says. So in that case, what is the central bank signalling all about? If it really does not count for anything, then why should we have -- a rather outlandish question -- a central bank at all? Also, why should the central bank signal anything at all?

Madan Sabnavis: No, when we are talking of the RBI, it is more a case of signalling the way in which they would like interest rates to move. Now we should remember that if you are talking of the overall borrowings of the banking system from the RBI, let's assume there are deposits around Rs 80 lakh crore. So I am talking of 1% which goes through both the term repo as well as the daily repo. I am talking of Rs 80000 crore, which is the cost of funds, being affected. So, one reason why the RBI felt that we move towards this variable term repo thing is to have better transmission mechanism.

It is just a case of saying that even though the RBI has always maintained that the interest rates are going to be market oriented, everybody has been waiting for the RBI to provide a signal and for the some reason if the RBI did not lower the rates, the banks will not lower their interest rates. But today, they have reached a situation where they have been pushed at a wall.

G-Sec yields are falling, banks have surplus funds and the RBI is still holding on to the repo rate. The banks till now were saying that okay, we would not lower our interest rates until the RBI lowers the rates. So things are generally falling in place. In case a trend is maintained for a longer period of time, we can say that is a good sign that we will actually be driven more by the markets and less by the policy.

ET Now: Banks are being realistic. If I can ask you to stick your neck out, if banks have got it, when do you think RBI will get it?

Madan Sabnavis: No, the RBI has been led by certain policy goals. The statement which the governor made during the time of the policy, it is absolutely relevant and pertinent that the RBI does not want to be in a situation where you lower the rates today and then raise it again. We all know that the inflation numbers go up in the months of December and January because of the base effect weaning off. In that case you cannot say that I am going to start increasing the rates again in the month of February. So as the central bank, as the monetary policy regulator, you need to make sure that you are assured at your target which you are talking of is within limits and that is the time when you start taking policy action.

ET Now: Except that the RBI clearly comes through as inflation targeter, but if you look at the data of the 46 central banks of the world which are inflation targeters, 30 of them are way off their target. So is it time now for some kind of re-think on the entire issue of inflation targeting?

Madan Sabnavis: No that is what has been the policy of the RBI all through. It is only after we started following the recommendations of the Urjit Patel Committee that we decided that we are going to do inflation targeting. Now, personally if you ask me, is it right for us to target CPI inflation number which the RBI has no control? My answer is no, that is not the right kind of an index. I would have still preferred to have the WPI, but the fact that we are also looking


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