Global ratings agency Moody?s has said the Reserve Bank of India?s (RBI) recent moves to curb liquidity are credit negative for banks due to higher funding costs and asset quality risks.
?Rising market rates will negatively affect economic growth if they persist, putting negative pressure on asset quality and earnings,? analysts from Moody?s Investor Services said in a report on Monday. Earlier this month, RBI had announced a number of measures to support the exchange rate and discourage currency speculation by soaking up excess liquidity. RBI had announced the short-term borrowing from the liquidity adjustment facility (LAF) will be capped at R75,000 crore. It also increased the marginal standing facility (MSF) and bank rate by 200 basis points to 10.25% each. Moreover, the central bank is expected to hold on open market operation for government securities worth R12,000 crore to further remove liquidity from the market.
?We expect banks to be negatively affected if higher rates persist for one or two months,? Moody?s said in its report.
The higher credit cost will also affect a borrower?s ability to pay back, hurting the asset quality of the system, Moody?s believes, particularly state-owned banks since they already have higher non-performing assets and large corporate borrowers.
