RBI has effectively raised interest rates without touching the policy rates, in an effort to salvage the currency — joining emerging market peers Indonesia and Brazil — as other measures to defend the sliding currency have so far proved futile. The central bank raised the cost of funds to make debt securities attractive for global investors who are being lured by rising bond yields in the US amid talk of bond purchases tapering. But the impact of the RBI move, which came late Monday evening, may be muted in changing the direction of the currency even though there could be a short-term rally. Governor D Subbarao raised the cost of borrowing under the marginal standing facility by 200 basis points and narrowed the window of borrowing for banks from it to just 1 per cent of deposits at Rs 75,000 crore citing the need to "restore stability to the foreign exchange market". These measures will force banks to seek funds from markets and offer higher rates for depositors. As a result, interest rates on short-term borrowings, commercial papers, deposit rates and loans rates may go up 25-50 basis points in the next few weeks.
Posted on: Thu, 18 Jul 2013 07:41:14 +0000
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