Inflation on its mind, RBI likely to hike repo rate by 25 bps
http://economictimes.indiatimes.com...-repo-rate-by-25-bps/articleshow/24790926.cms
(Seems 25 points Repo Rate hike is already factored in by the market - Considering it's RR, as some unexpected twist - sops might be in for the banks as well, as per reports)
Reserve Bank of India governor Raghuram Rajan is likely to raise the repo rate by another 25 basis points, keeping up the fight against inflation, when he makes his next monetary policy announcement on Tuesday, according to a majority of 16 economists polled by ET. At the same time, he's also expected by most of them to further lower the marginal standing facility (MSF) rate by an equivalent amount to ease liquidity further for banks as the previous tightening of this measure seems to have achieved the purpose of shoring up the rupee. A basis point is one hundredth of a percentage point. The repo rate, at which RBI lends to banks, is expected to be raised to 7.75%, according to the survey. A reduction in the MSF rate by the expected amount would see the differential with the repo narrow to 100 basis points, marking a return to what it used to be before the rupee slide. The cash reserve ratio and the statutory liquidity ratio are seen unchanged at 4% and 23%, respectively.
"With guidance in mind and recent stabilisation of currency and increasing probability of delay in US Fed tapering of quantitative easing, we expect the RBI to cut MSF rate by 25 bps to 8.75% on October 29," said Chetan Ahya of Morgan Stanley. Since taking over as governor, Rajan has focused on reining in prices - he raised the repo rate by 25 basis points in his first policy on 20 September - despite little sign that the economy is likely to revive after hitting a decade-low growth of 5% in the year to March. Still, both finance minister P Chidambaram and Rajan expect the economy to do better this year, although first-quarter growth was just 4.4%.
Meanwhile, inflation based on the wholesale price index for September was 6.46%, well above RBI's comfort level of 5%. This is also discomfiting for the Congress-led United Progressive Alliance, which faces state elections and then a national poll next year. "Inflation remains at the centre for the RBI," said Ashish Vaidya of UBS. "RBI could up repo because of inflation pressure. Currency is far more stable, so MSF could be cut. Pro-inflation control will give a signal that you want inflation to be curtailed, reduction in MSF would partly take care of the liquidity."
Before July, banks could borrow up to 1% of total deposits through the repo window, beyond which they would seek recourse to the MSF. In July, MSF was raised by 2 percentage points to squeeze liquidity out of the currency market and protect the rupee. A few days later, the repo window was limited to 0.5% of deposits. As the rupee strengthened, owing to overseas investors returning to emerging markets with the US Federal Reserve taper fears receding, the MSF rate was cut by 75 basis points in the September 20 policy. It was then lowered by another 50 basis points on October 7, as the central bank unwound tightening measures. Another reduction in MSF will result in lower short-term rates, which have already fallen to 9.05% from a peak of 11.40% in August. "External sector is stable so RBI may look to put the house in order now," said NS Venkatesh, head of treasury at IDBI BankBSE -2.56 %. "By hiking repo, they will anchor inflation. RBI may revise the growth target from 5.5% to 5%." A cut in MSF will signal a "benign monetary stance," said Moses Harding, Group CEO, treasury and international operations, Srei Infrastructure Finance, who advocates a more hawkish tone.
"A balanced stance will be to retain MSF at 9%. Given growth inflation dynamics, repo should be raised to 8%," he said. RBI may also widen the repo window back to 1% of total deposits. Banks have been borrowing on average Rs 40,000 crore under repo, Rs 20,000 crore under term repo and another Rs 30,000-35,000 crore under the MSF window. "The RBI may swing some surprises. RBI's view is that term repo should be more reflective of the market conditions," said Soumya Kanti Ghosh, chief economist, SBIBSE -0.03 %. "There could be some statement to make it more operative. This will bring down banks' dependence on MSF."
