We expect RBI to cut repo rate by 25 bps this week: BofA Securities
interview
The Reserve Bank of India’s monetary policy committee will likely cut benchmark repo rate by 25 basis points (bps) in its upcoming meeting this week, Anand Swaminathan, Senior Research Analyst, BofA Securities, said in an interaction. He spoke about the accommodative stance of the MPC, Indian banks’ evolving business practices and foreign investors’ view on domestic banks’ corporate governance standards.
Edited excerpts:
What are your expectations from the upcoming MPC meet?
Our house view is that the RBI will cut repo rate by 25 bps.
From a banking sector point of view, liquidity has continued to remain in surplus, despite the seasonality effect seen during June. Rate cuts in itself have a twin edge impact on banks, as margins squeeze. We also need to see signs of demand pick up. At this stage, there is no big issue on risk appetite for banks or the liquidity.
The real change has to be on the demand side. Corporate capex has to come back, retail sentiment with regard to 2-wheelers, consumer durables sales have to come back for credit growth to improve. That is not fully in banks’ control, we need to see how it goes ahead.
Will the regulator maintain an accommodative stance?
We are clearly at a stage where we are seeing the regulator being supportive of the growth narrative.
I think the focus is on efficient regulation, trying to balance stability and growth. A lot of macro prudential measures, which were being seen as overly tightening are being relaxed.
I think the RBI will be lot more pragmatic in terms of what are the tools required, what bottleneck banks face when it comes to delivering last mile credit. Finally, the government and RBI want better macro growth and financial penetration and part of that will be better credit growth.
When the RBI started sounding concerned about higher level of credit growth, it took them two years to cool things down. And we are just in fifth or sixth month of this accommodative approach.
Thus, it will take time. Also, there are global uncertainties which prompts corporates to apply a wait and watch approach.
As low-cost deposits remain a challenge, will Indian banks increasingly rely on money markets for growth?
On the deposit side, it is more in developed markets where LDRs (loan-deposit ratio) go above 100 per cent and you need a much deeper money market for that to happen. I don’t think at this stage we are ready for such a big transformation in terms of relying completely on wholesale funding.
As per capita income increases, people will naturally prioritise efficiency of their own surplus savings. In this scenario, CASA (low-cost current account and savings account) coming down is natural part of it. Banks will figure their own solutions to keep bigger float in aiding CASA. But I don’t think India is ready for a full move to wholesale funding, it will happen gradually as economy matures.
When do you see credit demand reviving?
We have a product called India loan growth indicator.
It is signalling that credit growth has bottomed and we expect some improvement in August-September period, when festive season starts. All necessary conditions to aid growth including lower borrowing cost, liquidity, government spending, tax cuts are present.
It will require an extraneous factor which prevents growth from recovering.
As Indian banks’ core income remains muted, will focus on other income rise?
That is a natural part of evolution of a banking system. As you get more advanced, risk in credit goes down and you can only charge so much on yield.
In India, we are having a vibrant tech ecosystem. It enables lot of value-added services to be provided to clients. This eventually increases productivity at corporates as well. The only question is whether it consolidates within big banks and smaller banks focus on SME market.
What are the key trends to watch in the domestic banking sector?
Liquidity has improved, and we need to see how long durable liquidity stays.
Asset quality trends in some segments needs to be watched, whether any new segments are showing stress. Also, a combination of risk appetite and credit demand from the ground, which subsequently aids economic growth, needs to be watched. Of course, we need to see the regulatory and government support as well. The other unknown is global uncertainties.
How are foreign investors looking at the corporate governance of Indian banks, especially after the IndusInd Bank fiasco?
India has hundreds of banks and thousands of NBFCs. We cannot form a holistic opinion on the basis one or two incidents.
One thing that foreign investors have seen as positive in India is the ability of regulator to act pro-actively and counter any build-up of risks. Second, the board structures, governance standards have improved significantly. You can see that in valuation multiples.
Some episodes will happen in any industry, as long as the regulatory framework can handle it and move forward, that actually improves confidence in the stability of the system.