Wednesday, May 6, 2009

Libor Dip May Cheer India Inc - May 06, 2009

The stock market cheerleaders have more reasons to rejoice. The three-month Libor (London Inter-Bank Offered Rate), an international benchmark interest rate used to price corporates loans has dipped below 1% for the first time on Tuesday and this is an indication that banks are more willing to lend. Corporate India may not only witness the softening of its interest costs on all foreign loans but could also find it easier to raise cheaper dollars to refinance the more expensive bridge loans.

However in the domestic arena, RBI in a move that could also lower interest rates on rupee loans, announced that it would close the second reverse repo window for accepting surplus fund from banks. With this, the local banks would now left with little options but to lend as much as Rs 40,000-50,000 crore. However, if they select to invest the surplus money in government or corporate bonds, it would lead to plummeting yields on these papers.

RBI from now onwards will conduct only one reverse repo in the morning while the afternoon reverse repo will be held only on reporting Fridays. But, it''s the drop in Libor that could have a more far-reaching impact on financial markets.

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