In twin moves to bring down the cost of money and ease liquidity, the Reserve Bank of India (RBI) on Monday cut the Marginal Standing Facility (MSF) rate by 50 basis points to 9% and announced seven-day and 14-day repo windows. With this, the gap between the MSF and the repo rate has narrowed to 150 basis points; RBI governor Raghuram Rajan had indicated at the central bank’s mid-quarter monetary policy announcement on September 20, after he slashed the MSF by 75 basis points, that the difference would gradually be reduced to 100 bps. “The MSF will do most of the walking,” Rajan had said.
Tight liquidity and sluggish deposit growth have compelled banks to raise their lending and deposit rates. While wholesale money may become somewhat cheaper now, banks are unlikely to drop loan rates in the near future. Indeed, with inflation coming in at 6.1% in August and the CPI nudging double digits, it’s unlikely the RBI will cut the repo rate — currently at 7.5% — when it meets next on October 29.
Bankers appreciated the measures, saying they would help lower government bond yields, money market rates and help banks reduce their cost of funds. “On the 3-month, 6-month rates, one can expect a fall of 50 bps and on the one-year rates, it could be 25-35 bps,” Ashish Parthasarthy, head of treasury at HDFC Bank said.
Last week, the RBI infused Rs 10,000 crore through OMO (open market operations), which helped bring down borrowings from the MSF window to Rs 38,718 crore, close to the borrowings from the repo window. Hitendra Dave, head of global markets at HSBC, said the move clearly signalled that the RBI wants the repo rate to be the effective policy rate. “This will be achieved in calibrated steps and it is safe to assume that by the next policy, the market rate could be around the repo rate,” Dave observed.
Bankers believe the lower MSF rate will certainly help bring interest rates down. “The CD and bulk deposit rates will come down lowering the cost of funds,” SK Jain, CMD of Syndicate Bank told FE.
The introduction of the 7-day and the 14-day repos, bankers say, will help create a more reliable term curve. “Money market products can now be better benchmarked and even wholesale deposits of banks will now have a benchmark for the pricing,” said NS Venkatesh, head of treasury