State Bank of Indiaís (SBI) decision to raise deposit rates and base rates has been driven by tight liquidity conditions left in the wake of RBIís attempts to stem the fall in rupee by keeping domestic liquidity in check. Barely a few days before he retires, Pratip Chaudhuri, SBI chairman, in an interview with FEís Ira Dugal & Vishwanath Nair says the measures have put undue pressure on liquidity. The outgoing chairam says one of his achievements has been the improved profitability of SBI while acknowledging the problem of non-performing assets has been a persistent concern over his two-and-a-half-year tenure at the bank. Excerpts:
Are you critical of RBIís recent moves to tighten liquidity and the manner in which it has been done?
This is something we have not seen before. If there is too much cash floating in the economy, you make a public declaration and raise CRR (cash reserve ratio). But why do it past 5pm and say I am not raising CRR, but the daily balance has to be 100%? Similarly, RBI says its repo rate is 7.25%, but only 20% of my borrowings can come from the Liquidity Adjustment Facility (LAF) window at that repo rate. Is that the real policy rate then? I donít think so. The real rate is the marginal standing facility (MSF) rate of 10.25% from where banks are meeting most of their requirement.
What do you think is important to do now?
To release liquidity. Call rates shot up to nearly 50% last weekend and then RBI had to annouce a special two-day MSF window. Deposit rates have shot up too. Short-term rates today are 10-10.5%. At least SBI has maintained them at 9% publicly. Other banks are paying more than 10%. The government itself is offering 11.5% on 60-day paper. So what happens to the retail borrower. And if you are getting 11.5% return on a 60-day paper, why should I invest in the governmentís 10-year bond. So I am very interested to see how the next 10-year-bond auction fares.
Do you think the swap facilities being offered on FCNR deposits and overseas capital raising for banks will help?
Itís not as simple as we are making it out to be, particularly for banks with international offices. There are very strict rules against what is called upstream lending ó that you go and open a branch in the US, raise funds and ship it back.