Reserve Bank of India (REI) governor Raghuram Rajan on Friday brought the focus back on inflation, increasing the repo rate — which in normal circumstances acts as the operational policy rate — by 25 basis points to 7.5% while simultaneously attempting to ease the funding stress being faced by companies and banks by bringing down the cost of money.
Partially reversing measures announced by his predecessor D Subbarao to support the rupee, Rajan brought down the marginal standing facility (MSF) rate by 75 basis points to 9.5% from 10.25%.
“The calibrated withdrawal will provide a boost to growth, reduce the financing distortions in the market and reduce the strain on corporate and bank balance sheets,” Rajan said, adding that easing the exceptional measures was warranted in the light of the improved external environment and measures taken by the government and the REI to tackle the current account deficit and its funding.
Cumulatively, these two measures will bring down the cost of funds borrowed by banks from the REI by roughly R450 crore, assuming an average liquidity deficit of R1 lakh crore.
Ironically, while the cost of market borrowings may ease marginally, loan rates for retail borrowers may continue to rise with bankers choosing to take their cue from the prevailing tight liquidity conditions as also the RBI’s decision to hike the repo rate citing the need to bring down inflation to “more tolerable levels” and to “anchor inflation and inflationary expectations”.
“Now the busy season has started so there is a huge credit demand and banks are scrambling for deposits. Deposit rates, I think, will go up and accordingly lending rates can also go up,” State Bank of India chairman Pratip Chaudhuri said.
The cut in the MSF rate brought down the cost of funds in the commercial paper (CP) and certificate for deposit (CD) markets — used by corporates and market to borrow short-term funds — by up to 25 basis points, with three-month CP rates slipping from over 11% on Thursday to near 10.5% on Friday and CD rates slipping from near 10% to 9.8%.
Banks can now borrow up to 0.5% of their deposit base from the RBI’s liquidity adjustment facility window at 7.5%. However, for any further borrowings from the REI, banks must resort to the MSF window at a higher cost.
Loan demand has already strengthened in recent weeks with non-food credit growing at its fastest pace in over a year