The unexpected repo rate hike announced by the new RBI governor Raghuram Rajan in the monetary policy on Friday spooked the markets. The hike to combat inflation overshadowed the moves to ease liquidity tightening measures imposed earlier.
The rate of the Marginal Standing Facility (MSF), at which banks borrow overnight from the RBI, was lowered by 75 basis points to 9.5 per cent. This means lower short-term borrowing rates, and should see interest rates on one-year commercial paper settle at 9.5 per cent from 10.5 per cent currently.
For corporates , this should translate into lower cost of borrowing on their working capital requirement, a sizeable relief in a cash-strapped scenario.
For banks, the lower cost of short-term funds is a welcome reprieve.
Currently, close to 60 per cent of banks’ borrowings is funded from the MSF window, and thus these rates matter more. By indicating that repo will once again become the operational rate, the RBI is signalling more cuts in the MSF to bridge the gap with the repo to 100 basis points (currently at 200 basis points).
As MSF rates go down, the cost of incremental deposits will also reduce. So, there may not be many base rate hikes for the time being.
But whether banks pass on the benefit of lower cost of funds to customers will depend on the liquidity position which is currently tight. As flows continue to increase on account of FCNR deposits and overseas borrowings, liquidity may start to ease and aid banks in the ensuing busy credit season. But for now, lending rates may not come down in a hurry.
Mohali adds to Ranbaxy ’s woes
It was a sober week for pharma major Ranbaxy Laboratories. The stock tanked over 27 per cent during the week following a ban on import into the US of drugs manufactured at its Mohali (Punjab) facility.
After its inspection of the Mohali facility in September and December 2012, the US Food and Drug Administration (FDA) cited significant violations of good manufacturing practices, including failure to adequately investigate manufacturing problems and establish adequate procedures to ensure quality.
Though generic Atorvastatin is the only key product supplied from this facility currently, the import alert may hamper Ranbaxy’s growth in the near-term for two reasons. One, Ranbaxy was banking on the Mohali plant for filing new products as the plants at Paonta Sahib (Himachal Pradesh) and Dewas (Madhya Pradesh), meant for the US market, have been under import alert since 2008. Out of the 38 products filed so far, nearly half were from the Mohali facility.
Also, select high-margin exclusive products, including the generic version of anti-hypertension drug Diovan, are believed to have been re-filed from this facility.
Now with the import alert, approval for these products will be delayed. Given the pricing pressure on Ranbaxy’s portfolio in the US and its high dependency on this market, new launches are critical to drive growth. The temporary halt in approvals will risk Ranbaxy’s revenue and profit growth.
The second reason is that India being a low cost manufacturing base, the company was also hopeful of improving its margins by shifting production from its Ohm Labs facility in the US to India. But, with all three facilities running into regulatory issues, margins are not likely to improve in the near-term.
Instead, now, with the Mohali facility also subject to the terms of the consent decree signed in 2012, the company will have to spend more to get the facility back on track. This will further dilute Ranbaxy’s margins.
Early resolution of the regulatory issues will be critical to the stock’s performance.
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