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Home loans, auto loans may become expensive

The hike in marginal standing facility to 10.25% may also make home loans and auto loans expensive

July 16, 2013 9:20 IST | India Infoline News Service
In order to arrest the speculation of rupee and attract dollars in India, the Reserve Bank (RBI) on Monday said that it would limit its lending of overnight funds to banks to Rs. 750 billion. If banks need more, they will have to pay a higher interest rate of 10.25%.

The move is expected to push up short-term borrowing for companies by a couple of percentage points and cause huge losses for bond investors.

According to banks, an instant outcome of this would be that the cost of overnight funds would cross 10% as their current overnight borrowing is over Rs. 930 billion.
This, in turn, would translate into higher short-term borrowing for companies. The Sensex which crossed 20,000 on Monday on hopes of a rate cut triggered by lower inflation could lose its gains as hopes of a rate cut have vanished.

The central bank said that it has raised the interest rate under its marginal standing facility (MSF) by two percentage points. The MSF is an emergency lending mechanism by which banks get funds when they exhaust their regular limits which have now been collectively capped at Rs. 750 billion.

RBI Governor D Subbarao raised the cost of borrowing under the MSF by 200 basis points and narrowed the window of borrowing for banks from it to just 1% of deposits at Rs. 750 billion 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.

On Monday, banks had borrowed Rs. 923.20 billion from RBI. However from tomorrow, their borrowing is restricted to Rs. 750 billion. Banks may struggle to meet its shortfall of funds.

The measures were declared after Reserve Bank of India (RBI) governor D Subbarao cancelled an event in Mumbai yesterday as he was called to meet Union Finance Minister P Chidambaram in Delhi.

The rupee slipped below its psychological 60-mark on Monday, despite stringent trading restrictions by RBI.

India's main policy interest rate, the repo rate, is unchanged at 7.25%.

The hike in marginal standing facility to 10.25% may also make home loans and auto loans expensive.

The Reserve Bank will continue to closely monitor the markets, the liquidity situation and the macroeconomic developments and will take such other measures as may be necessary, consistent with the growth-inflation dynamics and macroeconomic stability

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