Saikat Das| ET Bureau | Jun 20, 2014, 06.58AM IST
MUMBAI: The chances of loans for homes and automobiles turning cheaper have brightened with the rates on overnight borrowing falling below the rate at which the Reserve Bank of India lends to banks, indicating comfortable liquidity. If this trend persists owing to fund flows from overseas, banks may be able to slash rates even without waiting for the central bank to cut its policy rate.
Overnight short-term rates have fallen sharply by about 70-90 basis points, or about 9-10%, in just three days after the Reserve Bank of India on Wednesday infused Rs 10,000 crore through two-day term repo – a platform to lend short-term money to banks. A basis point is 0.01%.
“The move in short-term rates to 8.70/80% level was a temporary spike on the back of advance tax outflows,” said RK Gurumurthy, general manager (treasury), Lakshmi Vilas Bank. “Banks will watch out for budget proposals on fiscal consolidations and may then take a call to cut loan spreads, even without any repo rate cut by the RBI.”
The last date for corporate advance tax payments was June 15, which in turn, led to fund outflows but the government is expected to spend the same money back into the system in 10-15 days. This will also support easy liquidity.
Between Monday and Thursday, the inter-bank overnight call money rate whipsawed to 6.90% from as high as 9% earlier in the week. The daily weighted average rate on Thursday closed at 8.06%, 72 basis points or about 8% lower than its Monday level.
Similarly, the collateralised lending and borrowing obligation or CBLO rate – another platform for overnight lending and borrowing among banks and mutual funds – too has come off significantly. The daily weighted average rate stood at 7.87% compared with 8.80% on Monday.
“Lenders may think of cutting rates but without slashing the base rates, only when overnight rates sustain below or around 8% for the next few weeks without any sharp volatile movements,” said Debendra Kumar Dash, assistant vice-president (treasury), DCB Bank.
Banks may also bring down their daily borrowings from the overnight LAF (Liquidity Adjustment Facility) – a window where the RBI lends to banks up to 0.25% of their total deposits provided call and CBLO stay at 8% or below. “Banks would prefer borrowing from call market or CBLO markets, rather than the fixed 8% rate from daily LAF if overnight rates remain at 8% or below,” said Dash.
In the call market, banks need not give any collateral in the form of government securities, which is seen as an advantage.
Moreover, they may access money at sub-8% unlike the fixed 8%, dealers said.
The central bank also announced that it would conduct a seven-day term repo to infuse Rs 10,000 crore on Friday.
Source : http://goo.gl/DmNVXh