Stable rupee boosts RBI confidence

The MSF rate cut along with the decision to issue term repos of 7 and 14-day tenor will ease liquidity problems and help revive growth.

Written by Surabhi | Published: October 11, 2013 5:26:22 am

The 50 basis point cut in the marginal standing facility points to a more confident Reserve Bank of India,which believes that the rupee has stabilised — at least in the near term.

This was well reflected when RBI governor Raghuram Rajan on Tuesday indicated that even the $70 billion target for the current account deficit was quite achievable thanks to the stable rupee. More significantly,the RBI and the finance ministry are confident the deficit will be financed without drawing down forex reserves this year. Part of the confidence comes because rupee has managed to claw back to 61.39 against the US dollar on Thursday,a gain of over 10 per cent since it hit a record low of 68.85 in late August. The other is the easing of liquidity. The cut in MSF rates — the second such move in less than a month,along with the decision to issue term repos of 7-day and 14-day tenor will give space to the banking system that will not only be welcome during the festive season but will also,to some extent,help the finance ministry’s agenda of reviving growth by providing cheaper credit to borrowers. RBI data points that cash-starved banks have been borrowing steadily from the RBI’s MSF window. On Monday,they borrowed Rs 67,821 crore from the MSF window for a period of one day,while on October 4 they had taken Rs 38,718 crore for a period of three days using the same facility.

What Rajan is doing is to cut the noise in the monetary system to focus on inflation targeting. So it’s possible the central bank in its second quarter monetary policy review on October 29,may push the repo rate nearer to MSF. On Monday the factory production numbers will come while the US shutdown could continue to be a key concern for Rajan,the man whose preference for Chicago School’s anti-inflation stance is clear.

Surabhi is a special correspondent based in New Delhi

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