The Reserve Bank of India has made it more expensive for banks to borrow funds.

30 July 2013 - Which Way To Pay

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Setback for individual borrowers and those wanting to take out a loan

The Reserve Bank of India have made it more expensive for banks to borrow funds, which as a result, means they will have limited cash to loan to consumers. This will be a major setback for individual borrowers, who haven't seen a reduction in their mortgage or home loan rate for over a year. This is despite the fact that since April 2012, the RBI has cut the benchmark interest rate by 1.25 percent points to 7.5 percent. So, you were hoping for a cut in your home loan, mortgage or auto loan, think again, you will have to wait much longer than expected thanks to these recent measures taken by India's central bank.

Cost of borrowing increased

Governor D Subbarao has increased the cost of borrowing under the marginal standing facility by 200 basis points and narrowed the window of borrowing for banks from it to just 1 per cent of deposits at Rs 75,000 crore citing the need to “restore stability to the foreign exchange market”.

"If they wanted to raise rates, they could have directly raised the repo rate and I do not believe in the view that raising interest rates by 0.50-1 per cent will attract FIIs into Indian debt," said Ashutosh Khajuria, president, treasury, Federal Bank. "Simply because even a yield of 8-9 per cent and depreciation at 12-13 per cent is giving them negative returns.”

How long will these restrictions last?

The rupee, hit an all time low of 61.21 on July 9th and ended at 59.89 to the dollar. Bankers are now awaiting the RBI's monetary policy review on July 30, to find out how long these restrictions look like they will last.

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