What led to massive fall in Indian rupee? Find out here

Riken Mehta 

The Indian rupee plunged to record lows on Monday, touching a level of 58.15 per dollar as the unwinding in currency carry trade is leading to the massive fall in the domestic currency.

Simply put, FIIs invested in Indian equities and debts earlier which were offering better returns compared to US 10 year bonds. However, the trade-off is becoming unviable for FIIs as the yield on these bonds have shot up significantly in the past one month on fears of Quantitative Easing (QE) or massive bond buying program coming to an end.

Back home, the Reserve Bank of India (RBI) is asking banks to cut interest rates that would lead to lower yields on deposits, reducing the arbitrage opportunities for foreign funds. If this situation continues for some more time, then one can expect massive unwinding in currency carry trades.

Last week, RBI has also pointed out that it will intervene in the forex market only to curb the volatility. Reading between the lines, the analysts believe that RBI will not try to suppress the rupee depreciation. In such a case, one cannot rule out the levels of 60/USD in the near future.

Are SBI, HDFC Bank, ICICI Bank really passing on rate cuts benefit to borrowers?

Riken Mehta
moneycontrol.com

Since April last year, the Reserve Bank of India has cut the benchmark repo rate by 125 basis points (1.25 percent), the cash reserve ratio by 75 basis points and the statutory liquidity ratio by 100 basis points.

Repo is the rate at which banks borrow overnight money from the RBI, cash reserve ratio is the percentage of deposits that banks have to mandatory park with RBI, and SLR is the portion of deposits that banks have to mandatory invest in government bonds.

Despite the easing of interest rates by RBI, the weighted average lending rates of banks have declined by less than 0.5 percent, according to RBI data.

Banks have said they are not in a position to reduce lending rates because of tight liquidity in the system.

Also, to reduce lending rates, they should be in a position to cut deposit rates as well, which they may not be able to do at a time when the growth in deposits has been slow. 

The chart shows the trend in base rates of SBI, ICICI Bank and HDFC Bank over the last one year, compared to that in the repo rate and cash reserve ratio. Click here for chart

Chart: How Bank Nifty has reacted to RBI policy

Riken Mehta
Moneycontrol.com

The RBI today cut the benchmark repo rate by 25 basis points, as widely expected by the market. However, banking shares are under pressure as the central bank has made it clear that it has little room for further reducing interest rates, because of issues like high inflation, high current account deficit and supply constraints.

Bank stocks are under pressure as the RBI has projected a dour outlook on economic activity and business confidence. A slow paced recovery could further compound the problem of bad loans for the banking sector.

A quick look at how the Bank Nifty has reacted to the previous monetary policies.