With the RBI having done its bit by cutting policy interest rates by 50 bps to stimulate the economy and lift investor sentiment, the focus now shifts to the rate transmission process. Bloomberg TV India spoke to Keki Mistry, Vice-Chairman and CEO of HDFC, to assess the impact of the RBI move, and the road ahead.

What is the impact on lenders in terms of the way the RBI rate cuts have played out? The consensus was of 25 bps and we got 50 bps. What is your reaction to it?

We spoke to a few channels a few days ago right after the Fed pause and said that RBI may look at rate cut of 25-50 bps. So, 50 bps I don’t think was ruled out because inflation seems to have come down now much more than expected before, wholesale inflation numbers are running negative for 4.05 per cent or so, retail inflation numbers are running 3.6 per cent and global growth is a big issue; and China is an issue in terms of growth.

So, all these factors if taken together will point towards the expectation that inflation will remain moderate in the near term. We see very little on the cards to point towards higher inflation except the technical things like the monsoon’s marginal impact, but nothing very specific.

Therefore, a rate cut is going to give a fillip to industry — a boost to industry — because it is very critical at this point of time that we kick-start the investment cycle and get sentiments better. So, I think, yes, it is the right thing to do.

Also, I think it is a very comprehensive policy. The focus is not only on interest rate but on a whole lot of other things like, for example, the FIIs’ investment in government securities whose limit has been enhanced, which will mean more money coming into India. This also effectively means that it is a bit of a counter to any Fed rate hike expectations in December. This will also impact the housing sector and we will move to providing incentives to affordable housing.

We have seen an impact on housing finance stocks this afternoon. But we are wondering whether or not this will mean a pause after this. Do you see any threat to inflation in the weeks or months going ahead?

I don’t really see any pressure in the coming months. As I said, this is primarily because of the fact that global growth is so slow, global growth is so weak, that it is unlikely that commodity prices or oil prices can see a spurt.

Also, monsoons may have a marginal impact but I don’t see them having any material impact on inflation. The base effect may have some technical impact, because base will start getting lower and lower over time. But all that taken together I think I don’t see any serious threat on inflation in the coming months.

The big debate that we have been seeing for the past couple of months — and what the Governor has also been saying — is about transmission. We have also got a 40 bps rate cut from SBI. So what about transmission? Can you highlight that?

Transmission has taken a long time to happen because of the high cost of funds in the existing balance sheet of banks, and it does not reduce every time the RBI reduces rates. Banks tend to take slightly longer term deposits. If you say 40-45 per cent of the funds of the bank are on term deposit and let’s say the term is 18 months, then it take that much time to pull in the interest rate reduction to translate into lower cost funds. So there is always the timing difference.

But over a period the timing difference automatically fades.

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