The Reserve Bank of India (RBI) on Tuesday will announce its first quarter (April-June) monetary policy after taking a raft of measures in the last few weeks to halt the rupee’s free fall against the US dollar. A visibly worried central bank swung into action to curb the exchange rate volatility, which can potentially put the economic on the cusp of collapse.
Change of policy stance?
Till a couple of months back, bankers used to bet on the quantum of policy rate cut or the reduction of cash reserve ratio (CRR), the portion of total deposits banks keep with the RBI. Policy or repo is the rate at which banks borrow money from the RBI. It is currently at 7.25 percent while the CRR stands at 4 percent. Now, the situation is just upside down. The markets are speculating on rate hikes.
The Indian rupee recently hit record low at 61.32/USD. Since May, it has lost more than 11 percent against the greenback. This along with the widening current account deficit (CAD) have prompted the authorities to burn the midnight oil to devise strategies in wooing overseas investors. India’s current account deficit (CAD) stood at 4.80 percent of GDP in the previous financial year (FY13). On the back of higher gold imports, a higher CAD is a cause of concern. High import volumes push rupee down against the major currencies.
Will RBI hike rates?
“RBI may hike the repo rate by 50 basis points,” Moses Harding, an independent treasury expert with 32 years of banking experience told moneycontrol.com.
“Another 50 bps hike is expected in September. Traders should not give any panicky reaction to this action, if it happens. The effective interest rate has already gone up to 10.25 percent when RBI hiked the Marginal Standing Facility (MSF) and capped the repo borrowings. Now, a repo rate hike will not have any additional impact,” he said.
A couple of weeks back, RBI had raised the interest rate of Marginal Standing Facility (MSF) by 100 bps to 10.25 percent as against 9.25 percent previously. Banks can borrow money pledging their excess SLR (Statutory Liquidity Ratio in excess of mandated 23 percent) bonds in the MSF auction window. Last week, RBI capped individual repo borrowing to the tune of 0.50 percent of respective total deposits.
As per the mandated repo borrowing limit, banks together can borrow a little more than Rs 31,000 crore (based on deposits as on July 13, 2013). Banks, according to Harding, have to avail the MSF window to borrow money after exhausting their repo limits.
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“Traders (forex or bonds) have not built any fresh position expecting no rate action. The recent series of measures have had impact on the markets. However, we virtually cannot afford to term any RBI policy as a non-event. If rate hike takes place, markets will take it negatively,” said N S Raghuvangshi, president (treasury), Development Credit Bank.
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According to Jitendra Arora, vice president at ICICI Prudential Life Insurance, though no rate action (cut/hike) is expected but this policy is going to be subjective.
“We need to read the lines between. How hawkish is the policy stance is something that will be closely observed. The central bank’s outlook on the economy will also bear future indications,” he said.
Earlier, the (rupee) liquidity tightening measures, aimed at making costlier, were seen as an alternative for rate hikes.