'If liquidity is short, interest rates will remain high'

Although the Centre's market borrowings will be smaller in FY25, State Bank of India chairman Dinesh Kumar Khara believes lenders will find it hard to pass on any rate cuts by the central bank if they are short on deposits. Excerpts from an interview with Ajay Ramanathan and Shobhana Subramanian.

Benchmark yields are trending down, do you see interest rates also coming down?

These benchmarks are more indicative in nature. The way the asset-liabilities are stacked up in the system today, liquidity is short, especially for lenders who have 100% credit-deposit ratios. For any lender to give a loan or make an investment, there must be matching liabilities. If liquidity in the system is short, there will be a liquidity premium, so the end rate of the corporate bond to the borrower will remain high. This is one reason why in the past, we have not seen transmission of rates to the extent of the policy rate changes.

When do you think liquidity will ease?

My sense is that when we start growing at 7-7.5 or 8% GDP, the total pie of the liquidity will get enlarged. There needs to be more spending, we need a multiplier effect.

So even if RBI cuts rates, it may not get fully transmitted?

It is true that half the loans in the system are linked to the external benchmarks. However, if a bank does not have liquidity, it will price loans accordingly. How much they can pass on to borrowers will depend on the cost of their liabilities.

Can SBI grow its balance sheet at a compounded 15% over the next few years?