Short term rates in the money market have hit new highs with benchmark three month and six month rates moving into double digits. Double digit rates in this segment were last witnessed sometime in 2002 -2003. This comes in the aftermath of the RBI hiking the CRR, reinforcing its stance on removal of accomodation in monetary policy.
Banks are currently in a situation where their ability to generate lendable resources by running down investments in securities (primary government bonds) is limited. Most banks hold securities close to their statutory minimum. This fact has also been highlighted in a presentation by the RBI Deputy Governor, Rakesh Mohan in a presentation to an industry gathering recently.
With March traditionally being a month of tight money, on the back of large tax outflows and balance sheet window dressing activity, the worst (in short term interest rates) is probably yet to come. This is bound to increase funding costs substantially. More than anything else, funding costs for most financial intermediaries are governed by the rates in the money market.
No wonder then that lenders are contemplating another round of lending rate increases. Leading mortgage financier HDFC has already signalled its intent to do so. With most state owned banks also increasing their prime lending rates, borrowing cost for customers, both retail as well as corporate, can only move higher.
The ides of March await us.