TNS RBI hikes bank rate 350 bps, align with MSF; Not to impact markets
By Boby Michael
MUMBAI, FEB 14 (TickerNews Service): The Reserve Bank of India on Monday raised a defunct policy rate -bank rate- by 350 basis points to align it with Marginal Standing Facility, which itself has been set permanently 100 basis points mid-way between repo and reverse repo rate.
"This should be viewed and understood as one-time technical adjustment to align the bank rate with the MSF rate rather than a change in the monetary policy stance," the RBI said in a statement released late Monday.
The hike, which takes effect immediately, will mainly impact the penal interest rate charged on CRR defaults by banks, which has been the bank rate for long.
It will also result in the rise of reference rate as several organisations are still keeping many of their funding or financing rates linked to the bank rate, the central bank circular show.
"It is practically giving life to a dead rate. The main take-away is the CRR penalty impact," said Premanand Kamat, treasury head of Corporation Bank.
"Yes, there will be very rare cases of a CRR default. But keeping the penal rate much lower than repo rate is in a way incentivizing a defaulter. The penalty should be at least the MSF," he added.
The third impact listed by the central bank in its statement was bill discounting and re-discounting rates of banks, which has also been linked to the bank rate.
However, the bill discounting and re-discounting market, a very non-transparent, difficult-to-operate facility banks used to rely on for their short-term liquidity needs many years ago, is not going to make a comeback and therefore, there is no significance for bank rate hike in that context.
"A comparison of bills discounting market with modern-day money market instruments will be like comparing laptops with early days' mathematics tables," says Kamat.
The bank rate hike is not expected to impact gilts or money markets, he added.