The reason for the Reserve Bank of India’s (RBI) masterly inactivity last Friday was presumably because the central bank believes the measures it had taken to add to liquidity, such as the cuts in the cash reserve ratio (CRR), the special repo facilities and the repo rate cut, were working.
And indeed, overnight rates have come down significantly. The overnight Mumbai inter-bank offer rate, or Mibor, which had moved up from 8.4% on 9 September to a high of 17.2% on 1 October, fell to 6.07% on 24 October, a clear sign that overnight money has now become cheaper.
But a look at the three-month Mibor rate tells a different story.
As the chart shows, while the three-month rate, too, has come down from the high of 13.2% reached on 10 October, it remains at a high level. On 25 October it was at 11.67%, well above the 11.18% rate it was at on 1 September.
Also See Liquidity Still A Problem (Graphic)
In short, in spite of a 250 basis points CRR cut, a 100 basis points repo rate cut, an effective statutory liquidity ratio cut and other liquidity-enhancing measures, the three-month Mibor is still around 50 basis points above the level it was on 1 September.
One basis point is one-hundredth of a percentage point.
A similar situation is also seen in the dollar Libor, or London inter-bank offered rate. While overnight Libor rates have come down quite sharply from their peaks, the decline in the three-month Libor rate has been much more modest.
Apparently, while banks have no problems lending to each other for short periods, they hesitate when it comes to three-month loans. That’s probably because, in the current environment, anything can happen in three months. Shouldn’t RBI have listened to the message being given by the three-month Mibor?
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