Rajan’s give-and-take rate policy might just pinch you
Oct 29 2013 , Mumbai
RBI policy on expected lines; stocks, rupee rise
In its unrelenting battle against inflation, RBI on Tuesday decided to make it costlier for banks to borrow from it by increasing the rate at which it lends them money (the repo rate) to 7.75 per cent. However, it has provided additional money supply of Rs 20,000 crore through longer-term lending facilities like the seven-day and 14-day special lending windows. It has also reduced the marginal standing facility (MSF) by 25 basis points to 8.75 per cent to provide additional liquidity.
MSF is the more expensive window of RBI, where banks can dip up to 1 per cent of their deposits to borrow from it.
Wand or no wand, the stock market swayed to Rajan’s music. Sensex surged by nearly 359 points to end at a three-year high in an immediate response to the enhancing of liquidity for banks. Snapping its five-day losing run, the 30-stock benchmark closed just shy of the psychological 21,000 mark (29,929 at close) as investors flocked to rate-sensitive banking, realty, auto and consumer durables shares.
Nobody is as surprised as Rajan himself. In a select media interaction in the evening, he was very candid. “I don’t understand the market. I don’t know which way the market will go each day. If I knew which way the market would go everyday, I would be a very rich man... My job is not so much the market, my job is to ensure that the growth and inflation dynamics are appropriate for the economy. If it (stock movement on the day) is based on fundamentals, then I am happy. If not, I am unhappy because it will return to fundamentals at some point.”
Senior bankers and analysts admit that the country is heading for a slightly higher interest regime. But Rajan believes that there is room for banks to soften interest rates. “We do not expect an across-the-board reduction in lending rates, but we expect some rates to soften so that the investment climate improves.”
The RBI governor has not found too many supporters in banking circles. Aditya Puri, HDFC Bank CEO, said, “We will have to improve our deposit rate mobilisation. So we have to make it attractive by raising the rates. The lending rates will also go up.”
Arundhati Bhattacharya, SBI chairperson, said, “Rates will move but we cannot say which way. Our Alco needs to meet to decide on this.”
The credit-deposit ratio of banks is at an all-time high of 78.5 per cent, according to RBI data. This means banks have been lending about 78 per cent of their deposits — too high considering that there are reserve requirements that they need to meet.
Chanda Kochhar, CEO and MD of ICICI Bank, said, “Credit growth will slow while deposit growth will stagnate. The 18 per cent credit growth came with demand from the commercial paper market shifting to the bank credit market and demand for export credit. This year the banking sector will end with credit growth of just 15 per cent.”
Upasana Bharadwaj, economist at ING Vysya Bank, however, takes a cue from Rajan’s confidence to say that “the increase in funds made available from the term repo window is likely to shift the dependence on MSF by an additional Rs 19,000 crore. Given that liquidity conditions are not expected to worsen from current levels in the next few months and the dependence on MSF has already been reducing, the overall weighted average cost of borrowing for banks is likely to ease despite the hike in the repo rate.”
According to RBI, “It is important to break the spiral of rising price pressures in order to curb the erosion of financial savings and strengthen the foundations of growth.”
The rupee-dollar exchange rate is fairly stable these days with the oil marketing companies’ demand off the market, deposits in FCNR coming directly into RBI’s coffers and the US Federal Reserve postponing the QE3 tapering.
On the growth-inflation front, RBI has revised its projections for the year. Given the sluggishness, RBI has lowered growth forecast to 5 per cent from 5.5 per cent projected earlier. However, RBI expects a mild improvement in growth in the second half amid strengthening exports, early signs of revival in services and significant pick-up in agriculture. Additionally, RBI expects retail and wholesale inflation to be near 9 per cent and 6.5 per cent, respectively, by March-end.
RBI has said liquidity management has been improved to meet the strong pick-up in credit relative to deposit growth and festival-related demand for money.
As a result of the measures, the average draw from MSF declined from about Rs 1,40,000 crore in mid-September to Rs 40,000 crore by mid-October, and money market rates have fallen by 125 basis points. Going forward, however, the more durable strategy for mitigating the supply-demand gap in funds is for banks to step up mobilisation of deposits, RBI added.