 "V Ashok")
As expected, the Reserve Bank of India (RBI) has increased the repo rate by 0.25 per cent and reduced the marginal standing facility (MSF) by 0.25 per cent. The liquidity provided through the term repos of seven days and 14 days tenor has been increased from 0.25 per cent to 0.50 per cent of the Net Demand and Time Liabilities (NDTL), thereby improving the liquidity in the system from Rs 20,000 crore to Rs 40,000 crore.
It can be seen that RBI is also striving towards rolling back the liquidity tightening measures, which were introduced in July to support the rupee against the dollar as the difference between the repo rate and MSF has come down to the historical level of one per cent. The recent stability in the rupee, as a result of the narrowing trade deficit, has enabled RBI to unwind the special measures.
The increase in the repo rate will have a direct impact on the cost of funds and it will put pressure on the already-thin operating margins.
The economy already faces a stiff challenge in the form of sluggish growth. RBI has reduced the growth forecast from 5.5 per cent to 5 per cent for FY14. The higher interest rates caused by the repo rate hike would have a further negative impact on the pace of growth. The rising G-Sec yields over the past few months stand as a testament to the increased cost of borrowing.
The wholesale price index Inflation for September was clocked at a seven-month high of 6.46 per cent and is likely to remain elevated for rest of the financial year. As a result, RBI has not much choice in terms of the repo rate hike. It has reiterated that the priority is to keep inflation in check as high inflation discourages domestic savings in financial instruments and encourages retail investors to park money in gold and real estate, which has a chain effect.
The current hike in the repo rate, if and when passed on by the banks, will increase the cost of credit for the borrower. Cost of home, auto, education and personal loans will go up correspondingly.
The monetary policy faces the unenviable task of anchoring inflation expectations, amid tepid growth and weak business confidence. It is, therefore, important to craft policy responses so that the growth concerns are addressed in an environment of stable prices.
V Ashok
Chief Financial Officer, Essar Group
Chief Financial Officer, Essar Group
