'RBI unlikely to reverse liquidity tightening steps on Sep 20'

 
Mumbai: Reserve Bank's new Governor Raghuram Rajan may wait for signs of a sustained stability in the rupee and is unlikely to reverse the liquidity tightening steps at Friday's mid-quarter review, Standard Chartered Bank said Tuesday.

"While the rupee's 7.6 percent appreciation (against dollar) from September 3-16 is encouraging, the RBI might prefer to wait longer for confirmation of sustained currency stability - a key determinant of such a reversal," it said in a report here.

"A complete reversal of liquidity tightening measures on September 20 looks unlikely to us," it added.

In order to arrest rupee's fall, Rajan's predecessor D Subbarao in July had announced liquidity tightening measures, including a cap on banks' overnight borrowings which increased the short-term rates in the system.

The RBI reduced the banks' liquidity adjustment facility (LAF) borrowing limit from 1 percent of the total deposits to 0.5 percent and also asked banks to maintain higher average CRR (cash reserve ratio) of 99 percent of the requirement on daily basis.

The StanChart report, however, said the RBI might recalibrate some of its liquidity-tightening measures in the mid-quarter monetary policy review on September 20 to reassure the market that the steps announced are temporary.

According to the report, RBI Governor could reduce the daily minimum CRR balance from 99 percent, or marginally increase the LAF borrowing limit from 0.5 percent of net demand and time liabilities (NDTLs).

"These changes are unlikely to reduce the call rate substantially below the MSF rate which is at 10.25 percent, but we believe they would offer some comfort to the markets, with the hope of further easing later," it said.

StanChart expects the RBI Governor to stay hawkish on inflation front as August CPI inflation remained elevated, and moreover, WPI inflation accelerated to 6.1 percent. "The headline number is likely to keep the RBI cautious."
The report said the RBI may adopt a wait-and-see stance on September 20 given that the government is yet to announce measures to contain the fiscal deficit at 4.8 percent of GDP.

In the first four months of FY'14, the fiscal deficit reached a level equivalent to 60 percent of the budgeted target. StanChart expects the US Fed to taper its quantitative easing by USD 10 billion per month and maintain a relatively dovish policy tone.

"If the RBI only fine tunes the existing liquidity framework and reiterates its intent to gradually exit the tight liquidity regime, then we expect a limited market response," the report said.

"The markets will then watch closely for signals from the new Governor on the timeline and possible preconditions for a roll-back of liquidity-tightening measures," it said.

The report said given the uncertainty over the RBI's potential monetary policy responses, it remains neutral on government securities duration.

Rate cuts may be delayed with RBI focus on rupee: Barclays

New Delhi: With the Reserve Bank's policy focus geared towards supporting the rupee, the central bank may delay easing rates to between December and April 2014, a Barclays report says.

According to the global brokerage firm, the RBI is likely to remain focused on supporting the rupee, which has depreciated by more than 13 percent since May and crossed the psychological level of 62 against the dollar last week.

"As such, while the focus is on the INR, we think monetary policy calibration will eventually be biased towards further easing, rather than tightening. However, we think further policy easing will likely be delayed," Barclays said in a research note.

The financial services major believes key policy rates would be eased by as much as 75 basis points in this fiscal but it would be a "delayed" affair.

"We still expect 75 bp of repo rate cuts, but now we expect them to take place between December 2013 and April 2014, rather than our initial expectation of September -December 2013," Barclays said.

The industry has been demanding a cut in key policy rate to boost economic activities. Industrial output contracted for the second consecutive month in June.

Moreover, inflation rose for the second consecutive month and shot up to 5.79 percent in July, driven largely by double-digit rise in prices of food articles, including vegetables and onions.

The RBI, in its First Quarter Review of Monetary Policy on July 30, left all key interest rates unchanged.

The repo rate, at which the RBI lends to the system, was kept at 7.25 percent and the cash reserve ratio, the amount of deposits banks park with it, was unchanged at 4 percent.

The RBI is scheduled to hold its next mid?quarter review of policy on September 18.