Oct 30, 2013, 01.11 PM IST | Moneycontrol.com
Be ready for one-two more rate hikes coming through over the next few months and quarters, says Ananth Narayan of Standard Chartered Bank.

As expected, the Reserve Bank of India (RBI) hiked benchmark repo rate by 25 basis points to 7.75 points and reduced marginal standing facility (MSF) or short term rate rate by 25 basis points to 8.75 percent, but warned that more hikes are likely if inflation concerns remain.

Where are interest rates headed?

With the lowering of MSF rates and providing window for incremental funds through seven and 14 days repo bucket below the MSF rate, rates are likely to come off, says Janak Desai of ING Vysya Bank .

The overnight MSF rate is higher than the rate at which one can borrow money for the seven or 14 days window. So, the marginal cost of funds of banks will reduce and it will significantly help in transmission of rates to the final borrowers and industry, Desai elaborated.

Bank of Baroda ED Ranjan Dhawan agrees that public sector lenders will see their marginal cost for borrowings reduced but doubts if it will lead to reduction in overall rates. Instead, he fears that high inflation in the economy may compel the central bank to raise rates again.

Will borrowings get cheaper?

Shilpa Kumar, ICICI Bank does not think so. RBI’s move to hike repo rate by 25bps and cut MSF by 25 bps will mean a minor change at the short end of the borrowing cost and hence most banks cannot afford to make substantive change in their overall rate structure immediately.

Another rate hike in the offing?

Reining in inflation has been RBI’s priority. High prices of onion as well of other vegetables and fruits pushed up wholesale inflation for the fourth month in a row to 6.46 percent in September.

Annual food inflation touched its highest point since mid-2010 to 18.4 percent in September. Today’s RBI policy has provided a sense of relief to the stock market and investors because nothing unexpected happened, but given the way inflation has been soaring in the past three-four months, the market is now fairly ready to expect more repo rate hikes and so are investors, Shah adds.

Seconding Shah’s views, Ananth Narayan of Standard Chartered Bank adds that in November bonds worth Rs 75,000 crore will be issued, money withdrawal and currency in circulation would rise in the festive season, inflationary overhang remains and general elections will be held in the middle of next year, so it is fair to expect that the yield curve will steepen.

We should be ready for one-two more rate hikes coming through over the next few months and quarters. While ten year yields will soften now, they won’t fall below 8.5 percent and will hover between an 8.5-9 percent. But, shorter-end yields will soften, he added.

Meanwhile, Soumya Kanti Ghosh of State Bank of India feels any decision to hike rate in the future would largely depend on the trends seen in Consumer Price Index (CPI) and Wholesale Price Index (WPI) inflation data.

Going ahead, RBI’s moves would be focused more on anchoring inflationary expectations because its macro report points out that there are enough foodgrain stocks in the market and they could be released in the market. So, this could ease food prices from January onwards, she said.

The policy met expectations, really?

Along with high inflation, subdued growth is also another key concern for the Indian economy now. Economist Haseeb Drabu is of the view that this policy in some way is big on intent, but short on action.

“It does try to talk about long-term development of markets, so credit policy issues have been addressed, but monetary policy has been referred to. It’s surprising that despite outlining all five pillars the issue of prudential norms does not come into play,” he added.

Banks are looking at non-performing assets (NPA) of nearly 5 percent and restructured assets of about 13 percent by March 2014. In all, this indicates that nearly 20 percent of banks’ assets are facing some form of stress which is the highest ever. In such a distressed situation, it is criminal on part of RBI to not take any cognizance of this fact, he explains.

According to Drabu, short-term is engaging the attention of the central bank at the peril of impairing the long-term prospects of it.

Secondly, as far as interest rates are concerned, it has not been recognized that for the first time now, rate of fixed capital formation in the economy has fallen to 9 percent (seen before 2003-2004) from 15 percent.

For small firms, interest cost as a percentage of total sales is doubled, for medium sized firms is 2.5 times and for large corporates about 3 times. In such a scenario, a perennial rate rise will impair the growth situation far more than what has been taken cognizance of. All in all, RBI’s focus on short-term and that too on a specific issue is being done at the cost of long-term prospects of the economy, he elaborated.

Is RBI’s stance towards foreign banks worrying?

RBI’s announcement on new rules for entry of foreign banks that may even allow them to take over Indian banks has led to some optimism, but investors will not start buying small banks immediately; they will wait till clear merger and acquisition (M&A) policy on banks is out, believes Rashesh Shah, Edelweiss Financial Services . As long as the current 5 percent cap exists, it is unlikely for any foreign bank to have controlling stake in an Indian bank, he added.

Should foreign banks get near national status?

The draft paper on foreign banks being given wholly owned subsidiary status and near national treatment is likely to be released in mid-November. Narayan sees the need to have a rationalisation of policy for foreign banks as it would prove beneficial for the system as a whole. Currently, foreign banks in India operate as branches of the foreign parent and face restrictions on the number of branches they can set up in the country.

Source : http://goo.gl/86HlXk