Cheaper corporate loans may hinge on RBI's forward book

Companies anticipating cheaper loans following the recent cut in the repo rate and cash reserve ratio (CRR) may have to wait and see how the Reserve Bank of India's forward book plays out, with experts pointing out that the upcoming maturity of contracts may drain liquidity.

- Shayan Ghosh & Ram Sahgal

This may restrain banks from aggressively cutting deposit rates and passing on the benefit of lower lending costs to companies. While loans to individuals and small businesses may turn cheaper immediately, advances to companies may take longer since they are pegged to the marginal cost of funds-based lending rate, an internal benchmark that moves in tandem with deposit rates.

According to the latest data, RBI has a short forward book of $37.8 billion maturing over the next three months to one year, which could drain out liquidity. The data on forwards is as of April and released by the RBI on 30 May. Economists at HDFC Bank calculated that if the RBI wants to reduce its forward book—up to one year, by about 50%, it will result in a rupee liquidity outflow of ₹2.3 trillion. If it decides to let 70% of its forward book mature, the amount sucked out from the system will be ₹3 trillion.