FirstRand Bank, a financial services group in Africa is the first bank from the African continent to be granted a full scale commercial banking licence in India. The treasurer of the bank’s Indian arm, Krishnamoorthy Harihar, spoke to Business Standard on inflation rising to 10.16 per cent and its implications on interest rates. Edited excerpts:
Did you expect inflation to cross into double-digit figures?
It was slightly above expectations.
What can be its implications?
There can be increased possibility of a rate action if inflation doesn’t cool down in a couple of weeks, but good monsoon as well as a year-on-year impact may lead to inflation cooling down to lower levels by September.
What are the options available with the Reserve Bank of India (RBI)?
Normally, raising rates would have been an obvious choice but tight money conditions post the 3G outflows and impending tax payments might not leave much room for that in the short run until liquidity conditions ease off.
Can RBI raise rates?
The money market is already short of funds and relying on RBI for auctions. While the repo rates can be increased to signal an increase in interest costs, room for a cash reserve ratio hike is low because the market is already borrowing. With non-food credit growth also showing a substantial hike, RBI may raise repo rate by up to 25 basis points, while keeping a watchful eye on inflation for any future action.
Where do you see 10-year bond yields by July-end?
The yield should be in the range of 7.50-7.85 percent per cent. Any reduction in government borrowing programme due to healthy telecom revenues and disinvestment could be a booster for sentiment in the government securities market.
Where do you see interest rates headed in the next three to six months?
Directionally, upwards in the short term, but if inflation eases off and supply side looks healthy, interest rate increase may stabilise at current levels.
What measures can be unveiled to address the liquidity shortage?
We expect the government spending to resume soon. The relaxation of 50 basis points in maintaining statutory liquidity ratio (SLR) can be extended to a large level if needed. The system has surplus SLR which can be used to borrow money from RBI under the liquidity adjustment facility.