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RBI may not cut SLR
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January 29, 2007

We were talking to ICICI Bank a while back and asking them about the rise in deposit rates, Nilesh Shah of Prudential ICICI, Asset Management Company, joins in now with his thoughts on what is happening there and with the overall market.

Excerpts from CNBC-TV18's exclusive interview with Nilesh Shah:

How have you been reading those inflation numbers and what the government is trying to do to temper it?

I think that the government and the Reserve Bank of India is moving in the right direction to curb the inflationary expectations. A lot of these inflation numbers are also because of the base effect in somewhere over next two-three months, we think that the base effect will start tapering off and that will probably pull out inflation numbers by a small number and then the impact of liquidity crunch, impact of the duty cuts will all come into play and then inflation numbers will probably start slowing down a little bit.

What do you expect to hear from the Central Bank next week?

I think that the Central Bank will repeat its own stand that yes, if there is a legitimate need of credit, we will be happy to provide for it. Inflation running above 5.5 per cent is a cause of concern and whatever is necessary to bring it down below RBI's range between 5 and 5.5 per cent will be done.

We expect that there may be some roadmap on how the SLR cuts will be done, so that the adequate liquidity can be funded for the credit growth. So there could be some sort of roadmap announcements, not necessarily the SLR cuts right now but some sort of roadmap announcements under what circumstances SLR will be cut and probably there could be 25 bps hike in the repo rate.

What does that mean for the banking industry?

If you see the current stage of banking industry, their net interest margins are coming under pressure because of the incremental deposits being raised at a fairly high cost. If this trend continues then the NIMs will come under pressure or they will have to increase the lending rates, we expect the liquidity to remain fairly tight and that is probably one of the reasons why the Ministry of Finance has authorized RBI to cut SLR to fund the credit growth.

So somewhere the banking sectors will be a little bit under pressure because of the rising deposit growths not equally matching rise in the credit side and hence some pressure on the net interest margin.

The ICICI Bank made the point that maybe from hereon, it would be a little more tempered by way of loan growth, would you go with that?

They are the second largest bank in the country and they will have more pulse on the credit growth side. I think that the Reserve Bank is trying to slow down the pace of credit growth, especially towards real estate or the stock market or financial services kind of sectors.

That is probably the reason why we are seeing some sort of slowdown emerging from the individual banks side, though we have not yet seen on the aggregate basis, the credit growth slowing down significantly.

What is important to notice is that if the economy has to grow at 8.5-9 per cent growth level, it will require credit and the credit will have to come either from the local banking system or from the global banking system. So if the economy has to grow, credit is required and no matter, what RBI and the individual banks have tried to slow it down.

As long as the growth is there, people will be willing to pay quarter or half percent more and the growth will still continue.

And the funding of growth can happen then from the global system and which is where we have seen the ECB limits being raised and there could be innovations on the hybrid side, which can again fund some portion of the legitimate credit requirement.

Do you feel apprehensive that interest rates or this whole situation that we are discussing could spiral to an extent that may destabilize the equity markets or it will not happen to that extent?

No, I do not think that it will happen to that extent because over a period of time, the US interest rates could be on their way down not necessarily over next six months but certainly over next one year, people expect US interest rates to slow down.

We also expect the other global interest rates whether it is ECB or Bank of Japan or UK Central Bank, they will be all towards the fag end of their rising or they would like to delay their rising as much as possible, so that the growth can continue.

The oil prices have come down dramatically and that also puts a lead on the inflation. So all those things put together we are seeing that the current interest rate rises more function of the liquidity tightness and if somewhere that liquidity tightness can be absorbed or can be counterattacked or compensated by way of either SLR cuts or CRR cuts or from money coming in from foreign side whether ECB, FCCB or foreign director portfolio investments then liquidity problem can be solved and that means that the interest rates will not go up significantly higher from current level to destabilize the liquidity market.

Net-net we are seeing the Indian interest rates to remain slightly biased of its rising in the current synergy upto March based on the liquidity tightness and then from March onwards, starts falling down based on the SLR, CRR cuts and the US interest rates cuts or some sort of climb down over there. So I do not think that the interest rates will have significant impact on the equity markets over next six-twelve month's period.

We are almost at the tail end of the earnings, are you comfortable with what you have seen in the market trading at above 14,000?

This is the biggest surprise on the earning side, maturity of results across the sector has come way ahead of investors expectations and even in a case like Reliance Industries Ltd where the market's consensus was between Rs 2200-2300 crore (Rs 22-23 billion) and they came out with the mind-blowing number of 2800 crore (Rs 28 billion).

So even in the stock, which is most tracked and most watched, the estimate of analysts were significantly lower than what the actual number came. Not that every result is way ahead of analysts expectations, there are couple of bad results also but maturity of results have come ahead of analysts expectations and that will result into some sort of earnings upgrade for FY07 and probably for FY08 also and in this kind of scenario the market does get a comfort, does get boost to sustain at current level.

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