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In its monetary policy review unveiled on Tuesday, the Reserve Bank of India has left both the repo rate and the cash reserve ratio unchanged.
However, over the last few weeks, the apex bank has been trying to keep the currency from going into a free-fall. But these moves have spiked short-term borrowing rates. So, will it impact the interest rates of the loans taken by retail borrowers?
Cost of funds
Lending rates, which are linked to banks’ base rates, can come down only if there is a decline in the cost of funds of banks. But after RBI’s recent measures, this seems a tall order. By mopping up liquidity, the central bank has sharply increased banks’ short-term borrowing costs.
In the inter-bank market, these moves have seen the average call money rate shoot up to 10 per cent, compared with 7 per cent just a week ago. It could even go up to 11 per cent in the near future.
Banks also need to maintain a minimum daily CRR balance of 99 per cent of their requirements, beginning this fortnight. Over the last two days, banks have borrowed more than Rs 22,000 crore on a daily basis over and above the LAF.
The RBI had also announced the auction of Rs 3,000 crore each of 28-day and 56-day Government cash management bills. This instrument is used by the Government to meet its temporary cash requirements. These offered rates of 11.2 per cent. Short term rates have thus, spiked by almost 300 basis points.
What about long-term interest rates? RBI’s auctions of longer term government bonds offer an indication in this regard.
At a recent auction of Rs 15,000 crore of government bonds, ranging from two- to 19-year tenures, the two-year bond offered 9 per cent.
Despite all these measures, the rupee dipped back to 60/$ levels on Monday. In this background, the RBI’s assurances that its liquidity tightening moves will last only till the rupee stabilises, imparts little confidence.
Meanwhile, if these measures remain in place for a few weeks, banks will begin to feel the pinch.
To maintain margins, they may be forced to begin raising base rates.
Therefore, if you have a home loan or any other floating rate loan outstanding, expect your EMIs to bloat if the rupee continues to fall.
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