As central bankers the world over try their best to rescue cash strapped corporates and save banks from dissolving, the RBI continues to take calibrated steps. The Indian central bank today used the short term liquidity window to infuse cash into the system by allowing banks to borrow capital at 1% cheaper rate.
This leaves the gap between the repo rate (rate at which banks borrow from RBI, now 8%) and reverse repo rates (rate at which RBI borrows from banks, 6%) at 2%. The overnight lending rates and call money rates that were impacted by the RBI’s CRR reduction are expected to further cool off. However, each of these measures will have a lagged effect on the banks’ borrowing costs and until then, continue to strain their margins.
Meanwhile corporate India that has been choked for capital in the past few months may see some signs of relief as banks become more willing to lend. The productive use of capital can help iron out some of the concerns relating to slower growth and economic meltdown.
Interestingly, the RBI has stated:
Even as countries directly affected by the turmoil have taken aggressive action to manage the crisis, confidence and calm is yet to be fully restored in the financial markets. Due to financial integration, this uncertainty is transmitting also to countries outside the epicenter of the crisis.
This means that the RBI does not see the domestic economy being in any way shielded from the liquidity crisis if the global turmoil continues to unfold.