RBI signals continuation of a low interest rate regime
Yields on government securities are likely to see a marked decline following the Reserve Bank of India (RBI) decision to slash the bank rate by 100 basis points to 10 per cent. In fact, the prices of securities rose by 50 paise after the announcement.
This has implications for banks who have been increasingly deploying their funds in government securities and the corporate sector as credit off-take has been low. The rise in the price of paper will also lead to general capital appreciation in the protfolio of commercial banks, which have already benefitted owing to excess depreciation in 1996-97.
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The move is aimed at ushering in a lower interest rate regime, which the RBI has propounded for long. In view of the excess liquidity and the likely reduction in yields, many banks which had taken sizeable investments in government securities are likely to be hit. The market has greeted the news by taking fresh positions, particularly in the 12.14 per cent paper which is considered to be a benchmark security.
The gilts are definitely finding favour with us as the market reaction is that the prices of higher coupon securites are likely to go up immediately, says a source with a primary dealer.
Bank treasurers have been caught on the wrong foot with banks saddled with deployable funds over Rs 8,500 crore during this financial year alone and most of this money has flown into gilts. Banks are already showing reluctance to accept certificates of deposits as these are high-cost funds for them.
The banks have indicated a decrease in deposit rates while they are unsure about a reduction in the prime lending rate (PLR). Says a banker: A reduction in PLR was in the offing as most banks were planning to increase credit off-take and this step by the RBI will only hasten the process.
Money market dealers have heaved a sigh of relief following the cut in the bank rate as they had been badly hit by the RBI placing the 12.59 per cent government security on tap. The calls closed at 10 per cent yesterday and are expected to be in the range of 6 per cent after the repo amount of Rs 5,150 crore flows back in the system. Incidentally, the security placed on tap has enabled the government to raise Rs 4,686 crore.
However, the RBI move has caught merchant bankers by surprise. A majority of them felt that the move was totally unwarranted.
Two days ago, the central bank sought to enhance the yield on 12.59 paper and it is slashing the rate today. It is sending out contradictory signals, a merchant banker said.
Most of them felt that the debt market will be mired in confusion once again. Some of the recently floated papers will depreciate further, said a leading merchant banker. The private placement route is likely remain strong. And a large number of mid-cap corporates, public sector units, financial institutions crowding the market, said Kumar.