Measures Will Give Impetus To Floating Rates

Updated: Apr 30 2002, 05:30am hrs
It’s a pragmatic Policy. The RBI has maintained its stance of maintaining adequate liquidity in the banking system and also its preference for softer interest rates. However, to curb excessive exuberance in the debt markets, the Apex bank has tried to keep a neutral stance on interest rates even while stating its preference for soft interest rates. This very much goes along with our view that the interest rates are going to be range-bound for some time to come.

It is important to note that the RBI has mentioned that its stance of Monetary Policy will be to impart greater flexibility to interest rate structure in the medium term. The floating interest rate market should develop on the borrowing as well as lending side and this will reduce the interest rate risk of market participants. Banks should start offering variable rate deposit products to reduce the interest rate risk exposure. Governor Jalan has also stated that the long-term objective is towards realignment of interest rates on all types of debt instruments, both the Government and the private sector, within a narrow band. This would mean that the central bank favours lower credit spreads on corporate debt instruments.

Also, it is significant that the RBI has urged the commercial banks to review the present maximum spread over PLR and reduce them wherever they are unreasonably high so that the credit could easily flow to the borrowers at reasonable interest rates. Reduction in the risk weight to 50% for credit to the housing sector and investment in mortgage-backed securities (MBS) of residential assets is a welcome move. This will result in lowering of interest rates on housing loans to individuals.

The MBS market is also likely to receive a fillip as more and more banks start investing in securitised debt. The Reserve Bank’s efforts to develop money market and Government securities market need to be applauded. It has done very well in putting in place negotiated dealing system for the Government securities market.

Now, it plans to reduce the dependence of various market participants on call money market.

As call money market represents non collateralised borrowing/lending market, it is inherently a riskier market.

The RBI is looking to develop Repo market as an alternate to the call money market. Also, term-money market should also get activated as restrictions are put on the access to call money market.