Thursday,Sep 20,2007
Fed cut may prod RBI to soften rate regime
BS Reporter / Mumbai September 20, 2007
Fed cut may prod RBI to soften rate regime
BS Reporter / Mumbai September 20, 2007
Bankers expect the Reserve Bank of India to soften its view on interest rates in the light of the US Federal rate cut. Domestic loans and overseas borrowing may become cheaper.
The Indian financial system is driven more by the domestic factors and “Fed rate cut is one of the triggers to review rates “, said Union Bank Bank of India chairman M V Nair.
“There may not be direct correlation between the US Federal Reserve action and the RBI’s moves. But the country is more tuned to global trends especially capital flows which has implications on exchange rate and relative difference in interest rates,” said a chairman of medium size public sector bank.
Nair said: “the low domestic inflation, need to provide philip to credit growth (which has dipped to 22 per cent) and fed rate cut should see softening of stance (by the RBI)”.
The Federal Reserve lowered its benchmark federal funds target rate by 50 basis points to 4.75 per cent to avert any slowdown in the world’s largest economy. On the extent of decline in lending rates, S K Goel, chairman and managing director of UCO Bank, said the domestic interest rates could soften by about 50 basis points in the coming days.
This also means reducing deposit rates to control cost of resources. “The incentives for deposits may decline and the rate offered for bulk deposits would move down from 25-50 points from present level of 9-9.25 per cent”, he added.
The implications of Fed decision are not restricted just to lending rates. The Indian capital market may witness higher inflow from overseas. This has a impact on value of rupee which will make the RBI to do tightrope walk to avert sudden appreciation in value of the rupee versus dollar.
Another factor that will weigh on the RBI’s mind is the fact that the elevated domestic interest rate may attract funds further to take benefit of rate arbitrage.
Kaushal Sampat, chief operating officer of Dun and Bradstreet said ``the widened interest rate differential between India and the US could result in a further surge of capital inflows (especially FIIs), which may lead to an appreciation of the rupee”.
The RBI may be under pressure to intervene in the forex market to preclude appreciation of the rupee beyond its comfort zone. However, a sustained intervention in the forex market to support the rupee would lead to a further increase in the domestic money supply, which is already growing at above RBI’s target rate.
S S Mundra, general manager (treasury) with Bank of Baroda said the RBI may not follow Fed Reserves footsteps immediately but eventually will take cue and change monetary policy stance (read adopt soft rate policy).
The bond market has not impacted much here like what we saw in the US since some rate cut was discounted and the response from bond market players will evolve in coming trading sessions.
On the cost of overseas borrowing of banks and Indian corporates, BOB official said we can expect better pricing. Thus cost of funds may reduce slightly. The spreads (over the benchmark rates like LIBOR) may not change much.
Story Comments
Total Post : 2
Posted By : anjalir on 20 September,2007
RBI should not resort to rate cut immediately as a reaction to Fed's move. Firstly, ours is an emerging economy with domestic fundamentals entirely different from those of developed economies. Secondly, the rising oil prices, which may put inflationary pressures, cannot be ignored. Above this if RBI cuts rates it may further enhance inflationary pressures.The immediate and major concern for RBI in near term will be rising liquidity and rupee appreciation because of high inflows.
The Indian financial system is driven more by the domestic factors and “Fed rate cut is one of the triggers to review rates “, said Union Bank Bank of India chairman M V Nair.
“There may not be direct correlation between the US Federal Reserve action and the RBI’s moves. But the country is more tuned to global trends especially capital flows which has implications on exchange rate and relative difference in interest rates,” said a chairman of medium size public sector bank.
Nair said: “the low domestic inflation, need to provide philip to credit growth (which has dipped to 22 per cent) and fed rate cut should see softening of stance (by the RBI)”.
The Federal Reserve lowered its benchmark federal funds target rate by 50 basis points to 4.75 per cent to avert any slowdown in the world’s largest economy. On the extent of decline in lending rates, S K Goel, chairman and managing director of UCO Bank, said the domestic interest rates could soften by about 50 basis points in the coming days.
This also means reducing deposit rates to control cost of resources. “The incentives for deposits may decline and the rate offered for bulk deposits would move down from 25-50 points from present level of 9-9.25 per cent”, he added.
The implications of Fed decision are not restricted just to lending rates. The Indian capital market may witness higher inflow from overseas. This has a impact on value of rupee which will make the RBI to do tightrope walk to avert sudden appreciation in value of the rupee versus dollar.
Another factor that will weigh on the RBI’s mind is the fact that the elevated domestic interest rate may attract funds further to take benefit of rate arbitrage.
Kaushal Sampat, chief operating officer of Dun and Bradstreet said ``the widened interest rate differential between India and the US could result in a further surge of capital inflows (especially FIIs), which may lead to an appreciation of the rupee”.
The RBI may be under pressure to intervene in the forex market to preclude appreciation of the rupee beyond its comfort zone. However, a sustained intervention in the forex market to support the rupee would lead to a further increase in the domestic money supply, which is already growing at above RBI’s target rate.
S S Mundra, general manager (treasury) with Bank of Baroda said the RBI may not follow Fed Reserves footsteps immediately but eventually will take cue and change monetary policy stance (read adopt soft rate policy).
The bond market has not impacted much here like what we saw in the US since some rate cut was discounted and the response from bond market players will evolve in coming trading sessions.
On the cost of overseas borrowing of banks and Indian corporates, BOB official said we can expect better pricing. Thus cost of funds may reduce slightly. The spreads (over the benchmark rates like LIBOR) may not change much.
Story Comments
Total Post : 2
Posted By : anjalir on 20 September,2007
RBI should not resort to rate cut immediately as a reaction to Fed's move. Firstly, ours is an emerging economy with domestic fundamentals entirely different from those of developed economies. Secondly, the rising oil prices, which may put inflationary pressures, cannot be ignored. Above this if RBI cuts rates it may further enhance inflationary pressures.The immediate and major concern for RBI in near term will be rising liquidity and rupee appreciation because of high inflows.
Posted By : anjalir on 20 September,2007
RBI should not resort to rate cut immediately as a reaction to Fed's move. Firstly, ours is an emerging economy with domestic fundamentals entirely different from those of developed economies. Secondly, the rising oil prices, which may put inflationary pressures, cannot be ignored. Above this if RBI cuts rates it may further enhance inflationary pressures.The immediate and major concern for RBI in near term will be rising liquidity and rupee appreciation because of high inflows.
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RBI should not resort to rate cut immediately as a reaction to Fed's move. Firstly, ours is an emerging economy with domestic fundamentals entirely different from those of developed economies. Secondly, the rising oil prices, which may put inflationary pressures, cannot be ignored. Above this if RBI cuts rates it may further enhance inflationary pressures.The immediate and major concern for RBI in near term will be rising liquidity and rupee appreciation because of high inflows.
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