Economists welcomed the RBI’s liquidity easing measures announced yesterday. But they also expect a hike in repo rates to contain inflation expectations in the half-yearly credit policy announcement scheduled later this month.
Yesterday, the RBI cut the Marginal Standing Facility Rate (the operative policy rate) by 50 bps to 9 per cent. Bank of America Merrill Lynch Economist, Indranil Sen Gupta, said in a report that they were sceptical of the RBI’s tightening measures in July being able to defend the rupee since "the FII equity portfolio of $220 billion, which responds to growth, is far larger than the $28 billion FII bond portfolio, which may respond to rate hikes.”
He said that it was not surprising that the long-awaited FCNRB deposit-cum-swap facility (which has brought in $5.7 billion so far, to raise FX reserves) has been far more effective in stabilizing the rupee. He expects the RBI to cut the MSF rate by 25 bps in the October 29 policy. But he also expects a hike in the repo rate by 25 bps to contain inflation expectations.
ANZ’s Senior Economist, Roland Randall said in a note to clients that he expects the RBI to raise the reverse repo and policy repo rates by 25 bps, to 6.75 per cent and 7.75 per cent respectively; and then a further 25 bps hike in these rates, to end the year at 7.0 per cent and 8.0 per cent respectively. This would bring the interest rate corridor (the range between the RBI’s borrowing rate (reverse repo) and maximum lending rate (the MSF) to the policy repo rate plus or minus 100 basis points – the level at which it was before tightening in July. Complete ‘normalisation’ of monetary policy requires a relaxation of the restriction on borrowing from the Liquidity Adjustment Facility window at the policy repo rate, currently limited to 0.5 per cent of net demand and time liabilities. He expects RBI to take longer to lift borrowing restrictions than to adjust interest rates.
He said that Governor Rajan appears to be taking a more hawkish stance with regard to inflation and expects informal (and possibly even formal) inflation targeting to become the RBI’s central concern going forward. He expects this bias to become more visible once normalcy is restored. He said that although inflation is likely to have eased in September, this is a brief window between the departure of monsoon-related food price increases and the arrival of exchange rate-related price inflation for fuel and other imports.