In a fresh bid to aid Rupee, RBI Governor D Subbarao hikes repo rates by 200 bps--Economic Times 16th July 2013
MUMBAI: RBI has effectively raised interest rates without touching the policy rates, in an effort to salvage the currency — joining emerging market peers Indonesia and Brazil— as other measures to defend the sliding currency have so far proved futile.
The central bank raised the cost of funds to make debt securities attractive for global investors who are being lured by rising bond yields in the US amid talk of bond purchases tapering. But the impact of the RBI move, which came late Monday evening, may be muted in changing the direction of the currency even though there could be a short-term rally.
Governor D Subbarao raised the cost of borrowing under the marginal standing facility by 200 basis points and narrowed the window of borrowing for banks from it to just 1 per cent of deposits at Rs 75,000 crore citing the need to "restore stability to the foreign exchange market". These measures will force banks to seek funds from markets and offer higher rates for depositors. As a result, interest rates on short-term borrowings, commercial papers, deposit rates and loans rates may go up 25-50 basis points in the next few weeks.
The central bank raised the cost of funds to make debt securities attractive for global investors who are being lured by rising bond yields in the US amid talk of bond purchases tapering. But the impact of the RBI move, which came late Monday evening, may be muted in changing the direction of the currency even though there could be a short-term rally.
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Governor D Subbarao raised the cost of borrowing under the marginal standing facility by 200 basis points and narrowed the window of borrowing for banks from it to just 1 per cent of deposits at Rs 75,000 crore citing the need to "restore stability to the foreign exchange market". These measures will force banks to seek funds from markets and offer higher rates for depositors. As a result, interest rates on short-term borrowings, commercial papers, deposit rates and loans rates may go up 25-50 basis points in the next few weeks.
Home and auto loans will become expensive and further dampen sentiment in an economy where growth has fallen to a decade low. A basis point is 0.01 percentage point. Earlier in the day, Subbarao had cancelled his engagements in Mumbai and flown down to the Capital to meet the FM. ET had reported in its Monday edition that RBI was in favour of monetary tightening.
"If they wanted to raise rates, they could have directly raised the repo rate and I do not believe in the view that raising interest rates by 0.50-1 per cent will attract FIIs into Indian debt," said Ashutosh Khajuria, president, treasury, Federal Bank. "Simply because even a yield of 8-9 per cent and depreciation at 12-13 per cent is giving them negative returns."
The rupee, which touched a lifetime low of 61.21 on July 9, ended at 59.89 to the dollar. Bond yields rose 6 basis points to 7.58 per cent, up almost 50 basis points since last month.
International money market equations have changed since May 22 when US Federal Reserve Chairman Ben Bernanke hinted at reducing the $85-billion bond purchases as the US economy shows signs of revival. That pushed up the US 10-year treasury yield to about 2.7 per cent, about 100 basis points from their lows, making them attractive. The 7.5 per cent return on Indian government bonds, adjusted for currency hedging, yields about a negative return, forcing them to flee Indian bonds.
Foreign investors' ownership of Indian bonds fell to a one-year low as they reduced their ownership of rupee-denominated bonds by $99.5 million to $30.26 billion on July 11, data from the regulator shows. Global funds' holdings are down 21.4 per cent from record $38.52 billion on May 21 through July 11. "This means that banks will have lesser liquidity support from the Reserve Bank and they will have to manage liquidity from other sources," said ADM Chavali, executive director, Indian Overseas Bank. "The ability of banks to play in the market is being controlled by RBI. The liquidity is being controlled to contain volatility."
Banks, which borrowed more than Rs 92,000 crore from the central bank, may raise deposit rates, reversing a two month-old tentative beginning on cutting rates.
"If they wanted to raise rates, they could have directly raised the repo rate and I do not believe in the view that raising interest rates by 0.50-1 per cent will attract FIIs into Indian debt," said Ashutosh Khajuria, president, treasury, Federal Bank. "Simply because even a yield of 8-9 per cent and depreciation at 12-13 per cent is giving them negative returns."
The rupee, which touched a lifetime low of 61.21 on July 9, ended at 59.89 to the dollar. Bond yields rose 6 basis points to 7.58 per cent, up almost 50 basis points since last month.
International money market equations have changed since May 22 when US Federal Reserve Chairman Ben Bernanke hinted at reducing the $85-billion bond purchases as the US economy shows signs of revival. That pushed up the US 10-year treasury yield to about 2.7 per cent, about 100 basis points from their lows, making them attractive. The 7.5 per cent return on Indian government bonds, adjusted for currency hedging, yields about a negative return, forcing them to flee Indian bonds.
Foreign investors' ownership of Indian bonds fell to a one-year low as they reduced their ownership of rupee-denominated bonds by $99.5 million to $30.26 billion on July 11, data from the regulator shows. Global funds' holdings are down 21.4 per cent from record $38.52 billion on May 21 through July 11. "This means that banks will have lesser liquidity support from the Reserve Bank and they will have to manage liquidity from other sources," said ADM Chavali, executive director, Indian Overseas Bank. "The ability of banks to play in the market is being controlled by RBI. The liquidity is being controlled to contain volatility."
Banks, which borrowed more than Rs 92,000 crore from the central bank, may raise deposit rates, reversing a two month-old tentative beginning on cutting rates.
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