Short-term interest rates increase 25-30 basis points, shows data

Interest rates have inched up in the economy, notwithstanding the status quo in the monetary policy and continuation of the accommodative stance.

The reason why short-term rates have spiked is liquidity normalisation. The central bank on Friday removed Rs 2 trillion from the banking system through a 14-day reverse repo auction. Before the money gets reversed, the central bank can do another auction and continue to remove as much liquidity as it wants. The intention would be to push up short-term rates towards the reverse repo rate at least, and, when the economy normalises, towards the repo rate.

Rates have inched up 25-30 basis points (bps) in the short-term money market, ever since the normalisation announcement. For example, on January 1, the one-month rate was 3.01 per cent, and it closed at 3.53 per cent on Friday. Similarly, the three-month rate inched up from 2.99 per cent to 3.32 per cent, while the 12-month rate rose from 3.77 per cent to 3.9 per cent on Friday.

The rates on longer-tenure paper, too, have risen, but are still below 6 per cent, owing to open market operations, or secondary market bond purchases by the Reserve Bank of India (RBI).

The six-member monetary policy committee will meet in the first week of February to decide on policy rates. It is widely expected that it will be exercising a pause once again.

With short-term rates rising, banks that had pegged their lending and deposit rates to those instruments will increase their deposit and perhaps the lending rates. The first sign of that came when State Bank of India (SBI) increased the deposit rates, albeit by just 10 bps, for some segments last week.

SBI’s marginal cost of funds-based lending rate has remained unchanged for now. However, if short-term rates spike, it will have to factor in that into its calculation by the next revision.

From the RBI’s perspective, it would be wrong to assume that it wants an increase in interest rates. The demand in the economy is far from being robust, and inflation has suddenly slumped to a 15-month low of 4.59 per cent in December.

“There is no way to believe we are at the cusp of a rate-hike cycle. The rate cycle or monetary conditions are no longer a binary proposition. There are intermittent phases and sub-phases in the same cycle,” said Soumyajit Niyogi, associate director, India Ratings and Research.

“The intention of the RBI is clear. It wants to continue with its current stance and strategy, but will do some modulation in the strategy in sync with the development in the economy. At present, the modulation is shifting to a loose policy, from an ultra-loose one,” added Niyogi.

Meanwhile, the weighted average yields for long-term borrowing have increased to a 12-week high of 5.71 per cent, according to CARE Ratings.

The amount raised so far this year has crossed Rs 11.25 trillion — 70 per cent higher than in the corresponding period last year. It is 86 per cent of the revised central government borrowing limit of Rs 13.1 trillion for the year.