Reserve Bank of India governor Y V Reddy on Friday indicated that benchmark interest rates, currently at six-year high, won’t be coming down in a hurry
Says initial comfort for the markets has to come from the US
MUMBAI: Reserve Bank of India governor Y V Reddy on Friday indicated that benchmark interest rates, currently at six-year high, won’t be coming down in a hurry, particularly when there is uncertainty in the financial markets.
Instead, he hinted that the bank may widen the liquidity adjustment facility (LAF) corridor because of the uncertainty. The LAF corridor is the difference between the repo (rate at which the RBI lends overnight money to banks) and reverse repo (rate at which banks park their surplus cash with the RBI).
“In uncertain times, it is better that the policy introduces some premium, so the market pays a premium during uncertainty,” Reddy said while hosting the Bank of Mauritius governor at the RBI headquarters in Mumbai.
The RBI has hiked the repo rate seven times, 25 basis points each time, since October 26, 2005. However, in the same period, the reverse repo rate has been hiked only four times, as the RBI moved in to curb inflation by keeping liquidity tight.
As a result, the difference between the borrowing rate and lending rate for banks has increased to 175 basis points from 100 basis points in October 2005.
Bankers say that Reddy’s comments mean that policy rates are unlikely to come down soon given the global uncertainties.
“We have to recognise that we are living in uncertain times and the corridor will remain wide till these global uncertainties end. It means that rates won’t come down as early as some expectations,” said A Prasanna, vice president at ICICI Securities.
HDFC Bank treasurer Sudhir Joshi said that after hearing Reddy’s comments, he doesn’t expect the LAF corridor to be narrowed anytime soon.
“There was a time when the RBI reduced the gap from 150 to 100 basis points following requests from the market. Now the gap has widened. But the critical part is liquidity, the corridor is meaningless if there is enough liquidity,” he said.
Speaking to reporters, Reddy also said that the global uncertainty and high oil prices were not unexpected.
“In some sense, much of what has happened in not unanticipated, but of course the magnitude was difficult to guess. By and large, the uncertainties were there and continue, but as of now it is not clear when the situation will become normal or less abnormal,” he said.
Reddy said the initial comfort for the markets has to come from the US. “Policymakers are determined to ensure an early end to these uncertainties, but the US has to be a major source of comfort,” he said.
On Indian companies having exposure to foreign exchange derivatives, Reddy said the matter been on the central bank’s radar for long. “All this while, we have been flagging its risks and importance. We have also been involved in interactive supervisory situations and now there is some sensitivity (to the risks of forex derivatives),” he said.
r_joel@dnaindia.net
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