75 bps MSF cut will benefit small firms

A 25 basis point rate increase probably sends the signal that we need to curb inflationary pressures in the system. Inflation was high at 6.1% last month and we will see fuel see price hike impact in the coming months.

What the market is not looking at is that marginal standing facility (MSF) has been reduced by 75 basis points, which will reduce short-term rates. As short-term rates get lower, the small and mid-sized companies, a lot of which are borrowing money in the short-term window, will start getting the benefit of the lower MSF rate.

Also, if you see a lot of banks are borrowing the money in the MSF window and that money is today costing the bank something like 10.25% . This reduction of 75 bps will give them the ability or leeway to push lower interest rate in to the system.

So while the quarter percent increase in repo rate will push long-term rates marginally higher by 10-15 bps, short-term rates will get lower. I think that will help yield curve to straighten out. Clearly, we had a very heavily inverted yield curve in India, which is never a really good thing for long-term growth. In a growing economy you need a yield curve where short-term rates are lower and long term rates are high; so this to some extent corrects the imbalance in yield curve.

Whether there will be increase in home loan rate, we have to wait and see how the numbers pan out in the system. We can’t rule out the possibility because some of the banks have not increased the rate when the rates went up in July-September, except the State Bank of India. I would say banks will carefully watch for few days, see how much we are saving on the short-term side and then take a call.

The writer spoke to Dhwani Pandya of dna and Mihir Bhatt of Zee Business

Keki Mistry, VC & CEO, HDFC