The Reserve Bank of India’s (RBI) move to boost liquidity will have a positive, albeit marginal, impact on cost of funds, say bankers and industry experts.
The move is positive for banks borrowing under the Marginal Standing Facility (MSF) window as well as for those with significant wholesale funding and is expected to bring down the cost of funds by about 5-10 bps, according to analysts.
“The lowering of MSF rate will help in bringing the overall interest rates down. The certificates of deposit (CD) and bulk deposit rates will come down and, with that, even the cost of funds will come down,? said Syndicate Bank CMD SK Jain.
Private lenders like YES Bank and IndusInd bank, which have a high concentration of bulk deposits, are likely be key beneficiaries of the rate cut as rates for bulk borrowings via CDs are expected to come down. The benchmark three-month CD yield closed at 9.0833% on Tuesday, down from Monday’s 9.4483%.
Bankers also say that with MSF rate now at 9%, much below the banks’ base rates, short-term corporate borrowings might shift back to the commercial paper (CP) market, which, in turn, would reduce liquidity tightness seen in recent days. Credit growth, which has been higher than normal at about 18% in the last two fortnights, may come back down to about 16% now, say bankers.
?The 10-year G-Sec bond yield has eased by about 20 bps. CP were down by about 40 bps and will come down further. And companies may now look at commercial papers and debentures if they can get cheaper money there,? said UCO Bank CMD Arun Kaul.
Meanwhile, at a systemic level, Care Ratings expects a saving of Rs 150 crore due to the cut in the MSF rate. “Assuming average daily borrowings to be in the range of Rs 60,000 crore for the entire year, on an annual basis, the cost savings would be around Rs 300 crore or Rs 150 crore for the balance six months of the year,? Care Ratings said in a report on Tuesday.
The average daily borrowings under the repo window have increased from Rs 38,523 crore in August to Rs 39,721 crore in September. Average daily MSF borrowings in August stood little above Rs 40,000 crore, which increased sharply to Rs 66,229 crore in September.
The RBI cut the MSF rate by 50 bps to 9% and announced seven-day and 14-day repo windows to ease liquidity on Monday. RBI governor Raghuram Rajan had slashed the MSF rate by 75 bps during the central bank’s monetary policy on September 20. The governor is seeking to bring down the gap between the MSF and the repo rate (which is currently at 7.5%) to 100 bps. With the latest cut, the gap has been reduced to 150 bps.
