Savings Rate Cut
As more banks follow, be prepared for lower rates on deposits…
Shortly after SBI took the lead in cutting the rates of interest on savings deposits, many more banks have followed suit. Banks like PNB, BOB, HDFC Bank, Axis Bank, Yes Bank and Kotak Bank have all cut their rates of interest on savings by 50 basis points. Here are 3 things that we need to understand here…
Banks had no other choice…
Essentially that is what it boils down to. The banks were struggling with falling loan growth and rising deposits. The problem became a lot more acute after the demonetization drive of the government. In the two months of demonetization, nearly Rs.7 trillion came into the banking system in the form of deposits. That really put banks in a quandary. On the one hand, the loan growth was not picking up and on the other hand the deposit base was rising that had to be serviced. The banks had to choose between one of the two options. Either they could raise the rates on loans given or cut the rates on deposits. With loan demand already tepid and corporates having access to debt markets, a rise in loan rates was virtually ruled out. The only option was to cut the rates on deposits. Cutting savings rates was the low hanging fruit. With the growing CASA pie, banks had a problem with the 4% payable on savings accounts. The 50 bps cut will help reduce the cost of managing those accounts, where margins were under stress. This could just be a start!
Savers need to be pragmatic…
To be fair, savers need to be pragmatic. Just as loan rates are falling in tandem with the cut in repo rates, the rates on deposits will also have to fall. Otherwise, there is no way the banks can continue to be profitable and generate surpluses each year. There have been cuts in FD rates but that has still been much lower than the cuts in the lending rates. That has obviously put pressure on the NIMs of banks. The bigger reality is about real interest rates. A savings bank account that pays 4% interest actually pays 2% real interest after considering the average inflation of around 2%. That is absurdly high and nowhere in the world do savings account pay so much higher than the rate of inflation.With inflation headed lower, savers need to be more pragmatic and get prepared for lower rates on their deposits.
Forget the US
Over the last few days, most Indian markets had eyes riveted on the US economy, the US Fed and the dollar performance. That is not surprising because normally the US economy has set the tone for the entire global economy. That is partly due to the size of the US economy and partly due to the exorbitant privilege that the US Dollar enjoys. However, there is a subtle shift that is happening. While the Fed and Trump policies will still matter, India should increasingly keep an eye on other geographies…
Growth in EU and Japan…
A recent report brought out by the IMF has been quite explicit in highlighting that the big thrust to growth in the next few years will not come from the US. In fact, the US is expected to grow at less than 1.7% while the world economy will be growing at around 2.8%. Among the EMs, the growth will be driven by India and China. But, interestingly, among the developed markets, the growth in global GDP will be driven by the EU and Japan. After years of stagnation, EU is finally benefiting from a weaker currency. Trade is picking up and EU growth has shown positive cues in recent months.
With the ECB maintaining an accommodative monetary stance, the impetus to growth and output will continue. Japan is already a safe haven and could be increasingly contributing to global growth. India should ideally focus on these two geographies!
Vishal Sikka departs
But the grand show at Infosys must go on…
When Vishal Sikka finally submitted his resignation on 18th August, there was little by way of surprise. The relations between the founding promoters and the current board had deteriorated to a point from where there was really no turning back. Even as the slanging match between the promoters and the board goes on, there are three key things to understand here.…
Easier said than done…
When Murthy and his co-founders gave up full time management of the company 3 years back, the idea was to move Infosys from a promoter-run business to a professionally run business. That transition is apparently much harder than was originally envisaged. Even in normal times, it is not easy for founder promoters to cede decision making control to professional managers. This is more so, when the iconic brand was built by the founders over a period of more than 3 decades. Professional managers, like Vishal Sikka, obviously came in with a different set of expectations to the table. Obviously, Infosys did not have the institutional framework that could support this kind of a major transition. The rift was already wide open in the last one year because while institutional investors do control the majority shareholding of Infosys, it is the founding promoters who still have a control over the DNA of the company. Eventually, this decision was all about a DNA mismatch!
What happens to the stock?
If the initial reaction to the resignation of Sikka was any indication, then markets have reacted negatively to the news. The Infy stock was down over 10% and had witnessed heavy selling from institutions. However, this could be more of a temporary phenomenon and the prices could reverse once there is clarity on the road ahead for Infosys. At the end of the day, Infosys has been a tough company that has seen business disruptions like the tech meltdown in 2000 and the global financial crisis in 2008. Of course, there the challenge will be to focus more on the digital side of the business where most of the tech spending is actually happening.
