Short-term rates are rising and the buck stops at government

MUMBAI: Is it high time for capital expenditure? Short-term rates are rising, a result of tight liquidity in the market as the government is sitting on a huge cash balance. The rise in market rates goes contrary to the Reserve Bank of India’s interest rate trajectory, hampering transmission of ratecut benefits to consumers. Borrowing costs of companies have gone up by at least half a percentage point in the past one month.

"Volatility in short-term rates could well hamper monetary transmissions, which the RBI is unlikely to bear," said Piyush Wadhwa, head of trading-financial markets group, at IDFC Bank. "Markets are fearful over excess supply of securities, which could come via UDAY (Ujjawal Discom Assurance Yojana – the central government’s debt recast scheme for state utilities) and state bonds." "Short-term borrowing costs have clearly gone up by at least 50 basis points (half a percentage point), and they would not come down unless the RBI strengthens its measures pumping in liquidity," Wadhwa said.

The central bank has cumulatively reduced rates by 1.25 percentage points in the past year, while banks on average have cut their base lending rates by 0.6 percentage point until November-end.

But banks’ three-month certificates of deposit rates have increased and are now hovering at 7.80-7.90 per cent versus 7.40-7.50 per cent in December, dealers said.

Similarly, interbank call money rate, at which banks lend to and borrow from each other, rose to as high as 7.30 per cent on Wednesday, 0.55 percentage point higher than the repo, or policy rate of the RBI.

The government’s cash balance with the RBI has surged nearly five times to Rs 1.42 lakh crore now, from the Rs 30,800 crore reported on October 1, show latest data RBI data. This has led to a cash crunch in the market.

On Wednesday, the RBI declined to offer higher rates to investors as the debt fund arranger for the government was not in a hurry to raise funds via short-term debt security.