RBI eases liquidity as rupee gains

RBI eases liquidity as rupee gains

Cuts Rate At Which It Provides Overnight Funds, Opens New Lending Window

Mumbai: Banks will see a sharp drop in the cost of short-term funds with the Reserve Bank of India cutting the rate at which it provides emergency overnight funds, coupled with a new 7-day and 14-day lending facility for banks. The improved liquidity position of banks will help keep in check interest rates, which were facing upward pressure after RBI hiked key policy rates on September 20.
    Emboldened by a steady rupee, RBI on Monday reversed some of the measures aimed at tightening liquidity as part of its defence measures against rupee volatility. The central bank reduced its marginal standing facility (MSF) rate by 50 basis points from 9.5% to 9.0% with immediate effect. The MSF is an emergency funding facility for banks to meet shortfall in their overnight cash requirement. With RBI placing restrictions on how much banks can borrow under the repo window – the conventional facility for overnight lending to banks – the MSF rate has become the floor rate in money markets. RBI had hiked the MSF rate by 200 bps in mid-July to drain out liquidity and make it difficult for speculators to go long on the dollar.
    Besides reducing the MSF rate, RBI said that it would provide banks additional liquidity through term repos of 7-day and 14-day tenor for up to a fourth of the banking system deposits through auctions every Friday. Given that bank deposits amount to Rs 68.70 lakh crore, the amount of liquidity released because of RBI’s measures would be over Rs 17,000 crore.
    According to Keki Mistry, vice-chairman and CEO, HDFC, any institution that is relying on short-term borrowing will see a 50 basis points reduction in rates. But bankers say that it is too early to forecast a change in the direction of home loan rates as these are largely decided by the repo rate. Even as bond dealers expect RBI to reverse its liquidity tightening measures, there is fear that the repo rate may be hiked by RBI in its end-October policy to keep inflation in check.
    Earlier in the day, before RBI’s announcement, Nomura research forecast that 10-year bond yields would drop to 8.20% within two to three months, which is a meaningful 40-45 basis points lower than the current levels. “We also believe the cut in MSF rate will outweigh the repo rate hikes and provide the necessary bullish impulse to India rates,” the report said. Now, with RBI having cut rates some bankers are forecasting that bond yields will drop immediately.
    Bankers said that RBI’s move was prompted by confidence in the rupee being in the current range. After hitting a record low of 68.85 against the dollar on August 28, the rupee has gained 11.4% to close at 61.79 per dollar on Monday. 

 
HOW IT WILL IMPACT YOU 

• Interest rates may not go up; rate-sensitive stocks likely to rise on Tuesday 
• In the September policy review, Rajan had cut overnight rates but raised repo rate. Monday’s double-edged move will reduce rates and easing liquidity will bring down cost of short-term funds Additional liquidity through 7- and 14-day repos will benefit fit banks banks dependant on money markets for funding Immediate beneficiaries will be businesses that depend on bond market for funds 
• Future rates will depe nd on the rupee, which will be impacted by the US shutdown