Rajan holds fire, but EMI of your loan may still rise
Apr 01 2014 , Mumbai
RBI governor indirectly raises borrowing cost for banks
Within hours of RBI’s money policy announcement, Indian Bank marginally raised its base rate to 10.25 per cent from 10.20 per cent.
Not all banks may follow suit. State Bank of India (SBI), the country’s largest lender, decided against raising interest rates.
What hurt the lenders was the RBI move to reduce the borrowing limit from the overnight facility (called repo) while raising the cap on borrowing for longer terms through the seven-day and 14-day windows, called term repos.
“The RBI action of lowering the borrowing limit from the overnight facility (repo window) will increase credit cost of banks,” said Arundhati Bhattacharya, chairman of SBI. Short-term funds are often cheaper than longer-term rates.
“The cost of funds will go up. There will be better transmission of policy rate actions over a period if banks shift to longer-term repo from short-term repos,” she said.
Banks could earlier borrow up to 0.50 per cent of the total deposits of the banking system, which has now been reduced to 0.25 per cent. The banking system has over Rs 80 lakh crore in deposits.
Banks will not absorb the rise in cost of fund unless they are flooded with liquidity. Even if some of them decide not to revise base rates, they may increase the premium over the base rate and pass on the higher funding cost to the borrowers.
Base rates of most banks range between 10.10 per cent and 10.50 per cent. But the borrowing cost for the best companies ranges between 12 per cent and 14 per cent.
SS Mundra, chairman and managing director of Bank of Baroda, said, “Banks will have to depend on longer-term funds from RBI, which will increase the cost of funds.”
With the RBI’s focus shifting to inflation targeting, lending rates are unlikely to cool anytime soon. The central bank on Tuesday indicated that the pause would be prolonged.
The forward guidance was slightly hawkish. Governor Raghuram Rajan said, “RBI’s policy stance will be firmly focused on keeping the economy on a dis-inflationary glide path, that is intended to hit 8 per cent CPI inflation by January 2015, and 6 per cent by January 2016.”
“At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy. Furthermore, if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture,” he said.
Standard Chartered Bank in a report said RBI would consider monetary easing only if the headline CPI remained below 7 per cent for a considerable period (more than three months), and core CPI inflation came down near 7 per cent.
Banks have been raising interest rates over the past few quarters, either by hiking base rates or by increasing the premiums charged over the loan risk and tenure.