The Reserve Bank of India continued on a tightening mode hiking key policy rates by 25 bps. The central bank raised its key lending rate, the repo rate, to 6.75% and its key borrowing rate, the reverse repo rate, to 5.75%. The CRR has been left unchanged. The RBI also raised its inflation forecast for March-end to 8% from 7%.
Vice chairman and CEO of HDFC Bank Keki Mistry and chief economist of Kotak Mahindra Bank Indranil Pan, in an interview on CNBC-TV18 debated on what this would mean for the banking industry and home loan borrowers�at large.
Below is a verbatim transcript of their interview with CNBC-TV18s Elan Dutta and Shereen Bhan. For complete details watch the accompanying video.
Q: The rate hike has been along expected lines and the direction in which the Reserve Bank is likely to move now seems fairly clear that there will be further hardening of rates. The question is are we going to see an immediate interest rate revision or will rates in March at least remain stable?
Mistry: In my view, no. The market is already factored in much higher interest rates than what actually has happened. I dont think this quarter percent increase in rates by RBI will have any impact on interest rates in the system. If you look at the bond yield today, they have gone up by 2 or 3 basis points which is normal after a policy like this.
Q: What about deposit rates? The view is that deposit rates may not go up further from the current levels. Would you agree with that?
Mistry: The lending rates will be a function of funding costs. If deposit rates dont go up, I dont see any reason why lending rates will go up. You must recognize that the big question mark in what I say is oil. What I say is on the assumption that oil prices dont go much higher from these levels and in fact start correcting and start going back in the near future to the levels that were there a month ago.
Q: Hasnt the Reserve Bank dilemma increased? While the upside risk to inflation continue the Reserve Bank is now talking about emerging risk to growth as well?
Pan: Yes, that they are concerned about growth as well, given the dynamics of the global economy, especially, with relation to oil. At the moment we have seen that the oil prices have globally moved beyond USD 100 a barrel. There is definitely a downside risk for the Indian economy in all senses of the term.
Even though the policy looks slightly more hawkish than what we would have expected, they definitely resisted from moving by 50 basis points and continued to move by 25 basis points.
Q: This is the 8th rate hike since March 2010, given the fact inflation continues to be enemy number 1, do you now expect the Reserve Bank to move more aggressively or are you in the camp that believes the Reserve Bank should wait and watch and not move in May or perhaps even June?
Pan: I dont think they can be more aggressive that they have to move in a very calibrated way still. They still have to move by 25 bps, assess the system and move ahead by another 25 bps. The base view that we have as of now, given the inflation dynamics that we are looking into and given the way the growth dynamics in India is panning out, we think that about 50 to 75 bps from now on is definitely on in terms of the repo rate.
The peaks of the repo rate we are expecting around 7.25 to 7.50 but I dont think that they can be aggressive in the sense that they can move by 50 bps. I would still consider them moving by 25 bps at each step. I dont think they would be moving higher than 75 bps as per the current assessment.
The whole problem in this assessment is that whether oil goes to USD 120 or USD 140 we really dont know as of now. But given the fact that we are looking at oil more or less at the same average of USD 100 to USD 105 for the next financial year, 75 bps increase from now on, at the max, looks to be a fair assumption.
Q: The Reserve Bank for the very first time has acknowledged the risk to growth now. Given where inflation is and the fact that we are likely to see the rate hike cycle harden, what are you expecting in terms of credit off take and specifically growth as far as home loans are concerned?
Mistry: The most important thing in determining credit off take is going to be affordability. The cost of a house as a multiple of the annual income of our borrowers is today about 4.7 times. We believe that as long as it is in the range of 4.2 to 5.7, housing continues to be very affordable. Secondly, if you look at penetration of mortgages in India, its extremely low. The mortgage to GDP ratio in India stands at 8%. If you look at the Western World, in the US and UK, the ratio is in the 80s. In some of the Scandinavian countries its in the 90s.
In most emerging markets in Asia this ratio will be between 15% and 25%. What does that mean? That means the housing loans in the system can double and even if they double we will just get to the level where most of the Asian countries are. So, penetration is very low.
If you look at the demographics in India, 60% of Indias population is below 30 years of age, thats a fact which is well known. What is not well known is that unlike the Western World where people go and buy a house when they are in the 20s, people in India dont do that.
When an average middle class couple get married which may be in their late 20s they dont go and immediately buy an apartment of their own, they go and stay with the boys family for a few years, then they get children, children start going to school, then the extended family becomes too large, they need a house and thats the time people look to buy a house. The growth will remain strong. I continue to believe that on the housing side and I would say a similar thing even for bank credit, we should be looking at a growth which should be 20% or upwards of 20%.
Q: But for now the home loan borrowers, should they heave a sigh of relief?
Mistry: I think so. I dont think immediately there is any likelihood of rates going up because this is pretty much factored in.
Q: The Reserve bank has been accused of being behind the curve after the raise policy, which camp do you belong to? Is it behind the curve or prudent?
Pan: They are definitely not behind the curve is my own assessment. They have proactively kept liquidity tight, therefore, ensured that monetary policy transmission has happened. Since the liquidity has been tightened, the incremental increase from the low of the cycle was from three-quarter to the current 675. Going forward, they would be increasing interest rates but they would not be very aggressive.
They have to be very cautious in terms of increasing interest rates because it clearly points out that managing growth versus inflation is also crucial from a monetary policy aspect. It is not only inflation that needs to be looked at.
Also read: Can inflation be�tamed by raising interest rates?
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