6th Pay Commission proposals to result in CRR hikes: PNB

On Friday, some banking stocks rallied pretty hard on expectations that rates might be easing off. However, KC Chakrabarty, CMD, Punjab National Bank, believes that if the Sixth Pay Commission’s recommendations are implemented there may be some more liquidity in the market, which would result in further CRR hikes. He also sees some repo rate hikes but does not see banks increasing interest rates immediately.

Excerpts from CNBC-TV18’s exclusive interview with KC Chakrabarty:

Q: What could we expect from RBI at the next meet, could we see any pullback in the stance that they have had so far?
A: I don’t think anything will happen. It is too early. If the recommendations of the Sixth Pay Commission are implemented, it will result in more liquidity being infused into the market. So, there maybe further CRR hikes to rein in this liquidity, but I don’t think rates are going to be eased off so early.

Q: Do you expect repo rates to go up from here because a lot of market participants feel there could be another 50 bps tightening of the repo rate?
A: It may happen, but this would not result in banks raising their interest rates. Banks have already factored in a repo rate hike. They need not go in for another interest rate hike for at least another 5-6 months. If there is a 25-50 bps repo rate hike, banks may not increase their lending rates immediately, but there may be a hike in deposit rates so as to encourage people to save in this difficult market.

Q: If deposit rates go up some more, do you expect some squeezing of net interest margins if you are not inclined to pass down those rates?
A: A 50 bps increase in CRR or a 25 bps hike in the repo rate will not affect margins by more than 10-15 basis points. We will be able to achieve our targeted net income growth despite the pressure. Banks may not unnecessarily tamper with interest rates at this juncture. However, if the CRR increases by another 100 bps, then we may have to rethink.

Q: There are some reports which suggest that the demand for housing sector has scaled back quite significantly. What kind of credit growth do you think banks can maintain? Will it get closer to the RBI’s target of 20% or will it remain above the 25% mark?
A: Credit growth has to come down. If banks are unable to achieve 20% credit growth, RBI should take Monetary measures to bring it down to that level. Credit growth should stabilize at around 20-21%. It may be little more than 20%, but it cannot be more than 25%.

Q: The bond market has moved quite interestingly. The bond yield went up to 9.5% and now the benchmark yield is down to 8.7%. What is that signalling and where do you think yields are headed?
A: I don’t think 8.7% on bond yields is sustainable with this interest rate structure. When bond yields had gone up to 9.5%, many investors built up their bond portfolio believing it was a good rate for the next 10-15 years. However, credit demand in the pipeline was a bit more and people therefore tried selling out. That is why this has happened.

Bond yields will stabilize around 9%. A correction in bond yields is not possible unless inflation comes down. Source