Banks on their own can't determine when to harden rates, it all depends on the market, he told CNBC-TV18 in an interview.
"Liquid mutual fund sector has been hit harder because these are all steps for the bond market. It affects the repo rate, finance rate and banks are largely funded by deposit, so deposit rates have not been impacted significantly," he explained.
Below is the edited transcript of Pratip Chaudhuri's interview with CNB-TV18
Q: What do you think would be the likely impact on near-term rates because of what the Reserve Bank of India (RBI) has done overnight and what kind of signals are you picking up?
A: The signal is that RBI would do everything possible to defend the currency.
Q: At what cost?
A: That is secondary. So you do not look at cost. This is an emergency operation.
Q: Do you think the emergency operation could be a bit more long lasting as well because till last week many bankers felt it was a temporary measure but this is step 2?
A: I didn't say bankers felt, the government said. But we have to be ready. Whatever RBI feels that whatever time it may have to be taken will have to be taken.
Q: Would you say that the measures of the last two instances have already indicated that banks should be hardening rates over the next couple of months?
A: Banks cannot decide on their own. It would be led by the markets. Banks have not increased their rates and absorbing the shock. It is the liquid mutual fund sector which has been hit harder because these are all steps for the bond market.
It affects the repo rate, finance rate and banks are largely funded by deposit, so deposit rates have not been impacted significantly. In fact, we got inflow of liquidity about Rs 6,000 crore as people came away from the liquid mutual funds.
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