With interest rates expected to rise in the upcoming monetary policy review, Krishnan Asv, analyst, Ambit Capital, tells Sunaina Vasudev that banks may have a difficult quarter ahead. Edited excerpts:
What are your expectations from the monetary policy review?
Over the next 12 months, we expect the repo rate to inch towards the 6-per cent level, implying further headroom of 100 basis points (bps). Keeping this in mind, RBI should raise repo and reverse repo by 25 bps each in the forthcoming monetary policy meeting. We also expect RBI to maintain sufficient levels of liquidity in the system. Hence, do not anticipate a change in the cash reserve ratio (CRR).
Moreover, we expect RBI to be conservative in its growth assumptions and realistic about inflationary expectations.
Hence, RBI should guide towards an 8 per cent growth in the gross domestic product and 4.5-5 per cent inflation for 2010-11. In terms of monetary aggregates, we expect RBI to project a credit growth of 20-22 per cent, money supply growth at 150 bps higher and systemic deposit growth at 250 bps higher (22-25 per cent).
RBI may also address issues regarding the asset-liability mismatches emanating from infrastructure financing by banks.
What is your outlook for the banking sector in 2010?
Given that we are at the beginning of the increasing interest rate cycle, with credit growth at approxiamately 16 per cent, banks do not have pricing power across the board. We expect banks to selectively start passing the higher cost of funds to borrowers — only in the asset classes where individual banks are witnessing high growth.
We see deposit rates rising faster, as banks are mobilising resources to position themselves for the anticipated increase in the credit demand from the private sector. Lending rates will lag behind the rising deposit rates, squeezing net interest margins during the April-June quarter.
