The gloomy view the market has taken of the RBI’s latest monetary policy review seems overdone.
The reaction was more due to the build up of expectations in the run up to the review.
The net effect of RBI Governor Raghuram Rajan’s decision to slash the Marginal Standing Facility (MSF) rate and hike the repo rate is to immediately reduce the cost of funds for banks. With banks now borrowing close to Rs 39,000 crore via the repo window and Rs 50,000 crore from MSF, the big cut in the latter means lower costs for them. Banks’ effective cost of borrowing, which was 8.9 per cent, will now come down to 8.6 per cent — a 30 basis points saving.
The reduction in the daily Cash Reserve Ratio requirement from 99 per cent to 95 per cent will also ease the pressure on liquidity.
India Inc, which has been complaining about the exorbitant cost of short-term money post RBI’s mid-July measures, can look forward to some relief.
Interest rates on one-year commercial paper, which had gone up 200-250 basis points since July to 10.5 per cent, are now expected to drop to 9.5 per cent. “Because of abnormally high interest rates (after July), short-term borrowings by companies were completely disrupted.
“The RBI move will bring normalcy to corporate borrowers,” says Sudhir Agarwal, Fund Manager at UTI Mutual Fund.
Bankers can also take positive cues from Rajan’s statement that the gap between the MSF and the repo rates will be narrowed to 100 basis points, with the MSF doing much of the ‘walking’.
This is a hint that in the coming months the MSF rate will dip some more and the repo rate will rise less.
Yet, both bankers and corporates may still insist that they are not back to pre-July levels.
The hike in the repo rate will keep interest rates for project lending high. And by flagging inflation risks, Rajan has not even ruled out a further repo rate hike.
Bankers also point out that as they enter the busy season for lending, they may have to borrow more from the expensive MSF window. “While short-term rates will come down, lending rates will still depend on the liquidity scenario,” says Sowmya Kanti Ghosh, Chief Economic Advisor, SBI.
Bottomline: Even if they have gained some reprieve on costs, banks clearly are in no hurry to lower lending rates for their borrowers, retail or otherwise.