There was no threat to long term rates as most banks have held their long term paper in the held to maturity, or HTM, category, Chaudhuri told CNBC-TV18.
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He does not see base rates rising right away. He says commercial paper (CP) market and the certificates of deposit (CD), which were earlier in the range of 8-9 percent, would certainly move beyond the cut-off in the RBI auction of short-term paper.
The classification for raising rates is not along public sector or private sector lines. It would depend on who is at the short end of the curve, whose maturities are coming up, they would be required to raise rates, Chaudhuri says.
Below is the verbatim transcript of Pratip Chaudhuri's interview on CNBC-TV18
Q: This is a further tightening measure. We already saw some of the private sector banks raising base rates. Do you think now other private sector banks will follow and what about public sector banks like yourselves?
A: I would not think the base rates will go up right away but what will go up right away is the short-term rates. So, the commercial paper (CP) market and the certificates of deposit (CD) market pricing, which was earlier in the range of 8 percent or 9 percent would certainly move beyond the cut-off in the RBI auction of the short-term paper.
Q: How else will you read this development from the RBI? Are you now getting a sense that this is here to stay for the next four-six weeks, which means the September quarter could see perhaps mark-to-market losses and other collateral damage for banks?
A: Not particularly because the thing to be noticed is that it is the short-term rates which are going up and the curve is becoming inverse at the long end. So the long-term rates are still between 8.2-8.3 percent. Most of the banks have packed their long-term paper into the HTM category. So I would not be too worried on that account.
What would be more worrisome is the expensiveness and possibly non availability of short-term liquidity because if the government starts borrowing at 11-11.5 percent then the banks will have to borrow at slightly higher rates and corporates will have to pay still higher. So therefore the portents for corporate borrowing short-term would become extremely expensive.
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