Money & Banking

Is the RBI signalling a rise in rates?

Radhika Merwin BL Research Bureau | Updated on January 15, 2018 Published on April 06, 2017

While the RBI Governor reiterated his neutral policy stance, hiking the reverse repo rate, suggests just the opposite. In a bid to align money market rates to the policy repo rate, the RBI has increased the reverse repo rate by 25 basis points.

While this will ensure that call money rates move up, it will also insidiously raise interest rates for a segment of the market. The MCLR structure that has forced banks to lower rates at a faster pace during the rate-cut cycle, is sadly a double-edged sword.

With overnight rates and three-month T-bill rates expected to rise, very short tenure MCLRs are bound to inch up too. Banks publish the MCLR of different maturities — overnight, one-month, three-month, six-month and one-year. Different loans are benchmarked against a particular MCLR. While most retail loans are benchmarked against six-month or one-year MCLR, very short term corporate loans may be benchmarked against a one- or three-month MCLR. With rates on short-term MCLRs inching up, some of these loans may became a tad more expensive. While for now, rates may rise only for a small portion of the market, the party for borrowers is clearly over.

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Published on April 06, 2017
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