The Reserve Bank of India’s second quarter monetary policy brought cheer to the banking and financial services industry.
According to analysts, the liquidity-enhancing measures like reduction of marginal standing facility (MSF) rate and increase in term repo rates (7 and 14-day tenor) are expected to infuse Rs. 20,000 crore liquidity on a daily basis.
On Tuesday, the RBI reduced MSF rate by 0.25 per cent to 8.75 per cent from 9 per cent. Banks borrow from RBI at MSF rate during liquidity crunch and a reduction in MSF rate implies low cost of funds for banks. It also increased rates on term repos of 7-day and 14-day tenor from 0.25 per cent of deposits to 0.5 per cent with immediate effect.
These moves are expected to substantially benefit banks with high reliance on bulk deposits. YES Bank, IndusInd Bank, Axis Bank, ING Vysya Bank and ICICI Bank and NBFCs like LIC Housing Finance, M&M Financial and Shriram Transport Finance to name some.
“The increase in term repo liquidity is a positive surprise and puts the outcome of this meeting on the dovish side of market expectations. The effect of this is equivalent, we estimate, to infusing Rs19,000 crore of liquidity on a daily basis. This brings down the average funding cost of the banking system and is hence supportive of our bullish bias on India rates,” said Sonal Varma, India Economist, Nomura Financial Advisory and Securities.
The reduction in MSF rate is expected to help banks to reduce short-term interest rates and enhance their lending operations during the festive season.
According to Dipankar Mitra, Chief Economist & Senior VP-Research, Motilal Oswal Securities, the reduction in MSF rate and increase in repo rate involves rationalisation of rates leaving cost of funding relatively unchanged for the banks.
“On the other hand, liquidity enhancing measures to make available another Rs 20,000 crore in the term repo segment would make more funds available to the banks at market determined rates and would also help develop the market,” he said.
Aided by RBI’s move to cut MSF rate by 25 bps to 8.75 per cent from 9 per cent, banking shares including ICICI Bank, YES Bank, IndusInd Bank, Axis Bank, Union Bank of India, Bank of India and Punjab National Bank traded higher by up to 2 per cent Tuesday.
N Kamakodi, MD, City Union Bank said, “It’s a balancing act aimed at bringing inflation and liquidity under control, while looking at growth. It is perhaps the best possible solution to get a balanced result in the current scenario.”