Corp Pays More: RBI
By Shivaji Sarkar
The repo rate thaw by the Reserve Bank of India has surprised many in the industry, though they had been clamouring for it. It left the key repo rate, prime interest rate unchanged at 6.5 percent on April 6 after six consecutive rate rises.
This helps the retail buyers who have been pinched the most with the rise in housing and other consumer loans. But it may not be exactly a relief for the corporate. Their cumulative cost remains high with actual bank costs and may be more for short-term commercial papers. Whether it is a relief or changes needed would remain the key question till the next Monetary Policy Committee (MPC) meeting.
The industry has been clamouring for the rate pause citing that since May 2022, the continuous rise made credit expensive. It has risen to 9.4 percent with the highest cost at 15 percent. A few days back, FICCI President Shubhrankant Pande said that primacy should be given to growth and a case can be made for decoupling from the Fed and that looks good for India.RBI Governor Shaktikant Das announcing the thaw says Fed is never its priority and there are too many aspects in the country itself to care for.
The inflation rate is still beyond the RBI toleration limit despite it slumping to 5.2 percent. Das says the goal is 4 percent, the real tolerance that the bank has. Though he says that the cut is till the next monetary policy meet, his nuances indicate that if it is as per the RBI expectations, prices remain in check and growth as per estimates of 6.5 percent against the IMF figures of 6.3 percent and there are other measures as well, the relief may be for a longer period. He says, “If you see the monetary policy’s withdrawal of an accommodative stance, it means a progressive alignment with the target”.
The Governor says in conjunction with supply-side measures, the shocks could be multiple. A better indicator has come from OPEC and fall in crude prices. The future quarterly growth is estimated at $85 to a barrel. If it plunges further, as of now at $70, the growth pattern should be better, is the estimate.
Another positive is better rabi crop prospect but for the recent rains. However, the rates of pulses and commodities are spiralling. The central bank is cautious on the inflation rate. Indications are that if the summer inflation remains in check, which often is not, the nest policy meet would have greater flexibility.It is a pragmatic approach. If the global scenario improves in terms of prices, the move should boost the economy.
There is another aspect. Most liquidity in the economy is being injected by government spendings. Large part of the government finances is also raised through loans. It also has a cost. The banks are flushed with money more so because of standing deposit facility (SDF). It has a rate of 6.25 percent with the marginal standing facility (MSF) remains at 6.75 percent. The MSF rate is the interest rate at which the RBI provides money to the scheduled commercial banks who are facing acute shortage of liquidity. This rate differs from the repo rate and the banks can get overnight funds from the RBI by paying the exclusive MSF rate. Bank Rate is the rate or discount at which RBI grants loans or advances to commercial banks. Hence, it is also called discount rate. The money that commercial banks repay to RBI is the interest amount on the loans.
Thus, the effective rate hike since April last year has been 290 basis points (bps), says Das. It is 40 bps more than the announced 250 bps rise because of the SDF. So, the rates in actuality are more than it should have been now. The rate-hike pause thus has already built in hike. The RBI has been smarter than the industry. What the industry calculates at 9.4 percent is actually 9.8 percent. That is pretty high for the retail consumers as well. The nuanced raises were not easy to realise for the most.
Home loan rates are linked to the repo, but a substantial part of corporate loans is linked to the bank’s cost of funds, which includes money market rates. The short-term loans, often resorted to by the corporate through three-month commercial paper, are set to be more expensive.That is possibly the primary reason that the RBI could take a calculated risk amid global banking uncertainties as exposed by Credit Suisse and SVB collapse.
Western banks and economies are going through difficult phases. More trouble is likely in a fragile situation. There may be deeper underlying problems. Though the Governor says that India has better resilience, the situation remains not as firm as one should expect. Das says that under these circumstances, India has to be extremely prudent in actions. “We have always been very watchful and have adopted a calibrated and balanced approach and will continue to do so”.There are possibilities of shocks to the domestic banking sector. They have been told to keep losses in check and conduct various stress testing techniques for financial stability.
A positive bouncing of the forex kitty to $600 billion. It had slumped to around $524 billion in October 2021 form a high of $642 billion. It has risen with higher remittances of $107 billion in 2022-23 financial year trade performances. The reserves had crossed $600 billion in June 2021. It slipped because of the Ukrainian war and various uncertainties connected to it. It continued till May 2022.Lower merchandise trade deficit at 2.2 percent and robust growth in services exports have added foreign exchange reserves. Services exports continue to rise.
The rupee trade deals with many countries are another silver line for the future. However, it has yet to take off. Some deals have started but are facing teething troubles. Volumes are not picking up as was expected. The stakeholders are observing the strength of the rupee as well. Apparently for the RBI, it is a long-term objective and not a fancy issue as it is projected by many.Overall, the MPC projects a possible change in the economy for the better if the world does not have a major upheaval. — INFA
(The writer is former senior editor, The Financial Express and Professor, Indian Institute of Mass Communication.)