Letter to BS: Banks are at last moving towards floating rate of interest

Topics Finance minister | RBI

This refers to “A first step to revival” (August 26). The Finance Minister's revival package also contains guidance to banks to link lending rates to repo rate, a proposal being finalised by the Reserve Bank of India (RBI). Good that banks are at last moving towards the floating rate of interest. However linking with repo rate does not serve any purpose. It is a policy rate and not a market-determined rate. And it is relevant only for short-term lending, say, not beyond three months. There is no way we can swap it into a fixed rate. A floating rate must be a market-determined rate, either G-Sec yield or the Mumbai Interbank Forward Offer Rate (MIFOR), where the rate risk can be hedged by a swap either by the lender (to suit his asset-liability management) or by borrower (to suit his income flows) — though as on date the RBI doesn't allow MIFOR swaps for fear of globalising the interest rate environment.

 The RBI's efforts should therefore move towards a market-determined benchmark cost for funds, either a G-Sec yield of corresponding maturity, or 10-year G-Sec yield for medium- and long-term advances, and a T-bill rate for short-term loans of up to one year maturity.

C Chandrasekhar, Mumbai

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