RBI steps to check Re fall will hit credit: Moody's

The recent RBI measure to provide support to the rupee and check speculation in the currency market has been billed as credit-negative by rating agency Moody’s, which says rising market rates as a consequence of RBI step will hurt overall economic growth.

 "These measures are credit-negative for Indian banks because rising market rates will negatively affect economic growth if they persist, putting negative pressure on asset quality and earnings," Moody's said in a statement.

Last week RBI took some emergency measures to salvage the rupee from its current fall. It raised the cost of borrowing under the marginal standing facility, narrowed the window for banks wanting to borrow from it, and issued bonds to raise dollar funds. The rupee did harden against the dollar but very little.

 These measures seek to support the exchange rate and discourage currency speculation by reducing short-term liquidity and soaking up excess liquidity, Moody's said.

However, there is a risk that the period of tight money market liquidity in India may persist, which would eventually have a material negative effect on bank funding.
"We expect banks to be negatively affected if higher rates persist for one or two months," the rating agency said.

 In particular, banks that rely more on wholesale funding, such as Yes Bank and IDBI Bank, will be more vulnerable because their margins would suffer if they fail to pass on higher costs to borrowers, the rating agency said.

It said, the RBI's measures add to the challenges already affecting the economy and which will impact banks' operating environment.

 "We note that market reactions to the RBI's announcement have been dramatic, with market interest rates rising across all maturities despite the RBI's measures only targeting short-term rates," Moody’s said.