Economic Highlights
New Delhi, 10 April
2023
Corp Pays More: RBI
RATE THAW AIDS HOME BUYERS
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
(Copyright, India News
& Feature Alliance)
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