Will long-term rates move up as overnight lending rates see an uptick?

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Interest rates have been ruling low after the Reserve Bank of India (RBI) injected liquidity in abundance to mitigate the economic shock of Covid-19. Housing loan interest rates have fallen to the lowest ever level of 6.5%.

But interest rates in the shorter term have been on the rise since September-end as the Mumbai Interbank Offered Rate (MIBOR) has gone up to 3.86% from close to 3.80%, the Business Standard has reported.

The key question asked is whether the uptick in short-term interest rates results in loans getting costlier and depositors earning more on their FDs. Experts in the Business Standard report said it is too early to say so as there are multiple factors that influence the borrowing rates.

The report further noted that the three-month T-Bill (Treasury bill) yield rose from 3.27% on September 13 to 3.44% in the October 18 auction. The cut-off in the October 27 auction has further gone up to 3.56%, it added. The one-year T-Bill yield rose to 3.87% on October 18 and breached the 4% mark on October 27 auction and now stands at 4.04%, the report said.

The cut-off rate of the variable rate reverse repo (VRRR) auction increased from 3.61% at the beginning of October to 3.99% by month-end. A higher interest rate under the VRRR is absorbing liquidity present in the system.

Monetary Policy Committee (MPC) member Ashima Goyal in the October meeting had said that long-term interest rates were unlikely to move up.

The certificate of deposit (CD) rates are stable and if the deposit rates go up there could be a higher probability of the borrowing rates rising, Ananth Narayan, senior India analyst at the Observatory Group, is quoted as saying.

He noted that the benchmark that is used to determine the lending rates was the repo rate which is unlikely to be increased immediately.

Parag Waknis, a monetary economist who teaches at Ambedkar University in Delhi, is quoted as saying that inflation can be expected to pick up in the near future as the recovery has begun. This should prompt a correction in the lowered reverse repo rate.

The analysis in the daily said noted that the transmission of that into long-term borrowing rates for consumer and investment loans may not happen that soon considering the fact that the MPC focus is on supporting growth.

It quoted market participants as saying now that the operating rate in the short-term money market would shift from the reverse repo rate to the repo rate.

Considering the RBI’s accommodative policy stance, long-term interest rates are likely to hold on to their current low level.