Meanwhile, sharing his views on the September monetary policy, Srinivasan said that marginal standing facility (MSF) is the key rate that the bank is watching and its cost of funds is not linked to repo rate as of now.
In a bid to tame soaring inflation, RBI raised repo rate by 25 bps to 7.5 percent in its mid-quarter policy review. However, it reduced the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 percent. Using the MSF banks can borrow from Reserve Bank of India (RBI) in emergency situation when inter-bank liquidity dries up completely.
Srinivasan further added that the bank's cost of funds are increasing, but at slower pace.
In August, Axis Bank hiked its base rate by 25 bps to 10.25 percent per annum. But as of now, India's third largest private sector lender is yet to decide if it would opt for raising base rates again.
Below is the edited transcript of Srinivasan's interview with CNBC-TV18
Q: What have you made of the repo rate hike on Axis Bank in particular, do you think this will force your hand to move base rates higher?
A: I wouldn't specifically say the repo rate, ultimately the key policy rate or the effective rate as far as banks are concerned is the target overnight rate. As far as that was concerned it was Marginal Standing Facility (MSF). The cost of funds was driven primarily by what the overnight rate was and that was what the MSF was achieving.
If we look at post policy, one needs to keep in mind that MSF is now lower by 75 bps. So cost of funds is increasing, but possibly at a slower pace than what it would have if the MSF was not reduced.
However, banks were waiting for this policy to see what the medium term outlook on cost of funds is. To that extent, one needs to calibrate our base rates accordingly. We had increased base rates by 25 bps after the July hike and as we go into the next quarter we will have to see as the cost of funds to some extent nudge up, how much of that to pass on.
Q: CD (certificate of deposit) rates have come down, yields have actually fallen in the 24 hours after the credit policy but what will medium term costs look like, what will you price in, will you price in another repo hike and therefore what are the chances that banks will have to increase base rate at all?
A: The cost of funds is primarily not linked to the repo rate as of now. We will have to see what our cost of funds for the next quarter would be and how exactly the trajectory is likely to be.
Q: But CD rates have come down, will that indicate you all will not have to raise base rates?
A: Ultimately, as deposits mature one is repricing them higher because before July 15 our deposit costs were much lower. As those deposits mature we are still pricing it higher than where it was. To that extent, overall cost of funds is likely to nudge higher at a slower pace, but still possibly there would be need for some adjustment in terms of lending rates.
If you look at what the governor said, he said he expects the MSF to do more of the working than the repo rate. Broadly, there is a status quo in terms of overall environment that leaves little room for doubt in terms of what is the target repo rate and target MSF rate is going to be because he has again said that the corridor is likely to be 100 bps.
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