India’s financial services sector hit by Morgan Stanley downgrade

Rating cut to “cautious” from “in-line.”

This came after the Reserve Bank of India, the central bank, increased the marginal standing facility and bank rates. Morgan Stanley said this should tighten liquidity and increase market interest rates. With economic growth refusing to rise, higher rates will be negative for banks.

RBI on Monday fixed the borrowing limit for banks at 1% of the system’s net demand and time liabilities, or banks’ total deposit base. The overnight borrowing limit for the system now stands at Rs.75,000 crore (US$12.6 billion) for the entire banking system. This borrowing limit will take effect on July17.

If a bank falls short on liquidity, it can get money from the central bank at a much steeper rate and under an emergency liquidity facility known as the marginal standing facility (MSF). Under this facility, banks used to borrow money at the repo rate plus 1%, or at 8.25%.

Effective immediately, however, banks will have to pay 2 percentage points more, or 10.25%, to draw money under this facility. MSF now stands at 300 basis points above the repo rate of 7.25%.

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