Mr. P. S. Shenoy is a CAIIB and possesses the rich 35 years of banking experience. Mr. Shenoy started his career with Bank of India (BoI) as an officer in April 1966 and rose through the ranks to head BoI’s operations at Hong Kong and New York. He was with BoI till 1998 and his long experience includes heading operations in international division, finance and group strategy covering, planning, treasury and monitoring of subsidiaries.

Currently, Mr. Shenoy is the Chairman and Managing Director at Bank of Baroda, one of India’s leading nationalised banks. He is also heading BoB’s subsidiaries, BoB International Finance and BoB Cards. Apart from this, he is a member of various committees constituted by the RBI and Indian Banking Association (IBA).

In an exclusive interview with Equitymaster, Mr. Shenoy shared his views on the Monetary Policy 2004-05 and his outlook for interest rates and rupee.

EQM:  What is your first reaction to the monetary policy?

Mr. Shenoy:  I think it is a good policy. It gives the message of stability, in terms of continuity of monetary policy stance of providing liquidity to the system for credit growth and investment demand for credit. Also, interest rate wise, the continuation of the stable stance is good and with that there is the flexibility that can be used anytime. In terms of other macro economic factors, the GDP growth is expected at 6.5% to 7% and inflation is likely to be at around 5%. Several measures have been introduced to strength the financial sector and banking sector in particular.

EQM:  Regarding interest rates, do you concur with the RBI views going forward?

Mr. Shenoy:  Yes, I concur with the view. What RBI says is that although changes are taking place abroad, what will happen in India will be on the basis of factors, which are relevant to India. Even if US interest rates go high, here if the situation demands that the interest rate should be lower, particularly in view of enough liquidity in the system, that may not take place. So, the factors which are operating in India in terms of ground realities and in terms of the expectations, particularly of the small scale industry and agriculture, the expectation is that rates should be lower. Although international factors will have some kind of bearing, what will finally prevail, will be based on only the Indian situation.

EQM:  Regarding lending operations of the banking sector, do you concur with the growth numbers given by RBI?

Mr. Shenoy:  For the money supply growth, deposit growth and credit growth, I think I concur with the growth rate numbers given by RBI.

EQM:  So you don’t expect interest rates to go up soon and adversely impact the credit growth scenario in the country....

Mr. Shenoy:  Absolutely. Because the liquidity is there, I don’t expect the rates to go up as such. Also, the inflation is expected to be around 5%, which is also not very high. So I don’t think interest rates should go up.

EQM:  Regarding the profit on government securities, what should be the PSU banks’ response to stable interest rate scenario? Are you looking at a scenario where they will book more profits?

Mr. Shenoy:  As far as G-Secs are concerned, I think they should be looked at in a holistic way. G-Sec profits happened during last two years because high coupon securities were there, interest rates plunged and therefore the value of those securities went up. Equation is that now the banks are going to book profits. Well, it depends on what percentage of their present portfolio is still in high coupon securities and how much they want to book. In the case of our bank (BOB), we had appreciation of Rs 28 bn (unbooked gains). Even after sale of investment to the tune of Rs 4 bn to Rs 5 bn, Rs 28 bn is left. So we can book the remaining profits whenever we want. So whatever appreciation is there in the portfolio will remain if interest rates remain at current levels, and if rates soften further because of liquidity, in that case the appreciation will increase.

EQM:  What is your view on the forex markets? Do you see rupee strengthening further?

Mr. Shenoy:  I personally feel that not notwithstanding the rupee depreciation in last few days, the rupee is going to strengthen.