The Reserve Bank of India is likely to maintain status quo in the mid-quarter review of its monetary policy as domestic factors will outweigh external factors on September 20, experts say.
“The RBI’s decision on Friday is likely to be based on local factors such as inflation, rupee and impact of its liquidity tightening measures that were announced in July,” said Mohan Shenoi, President – Group Treasury, Kotak Mahindra Bank.
Fed stimulus
The new RBI Governor Raghuram Rajan had delayed the monetary policy announcement from September 17 to September 20 to take into consideration the US Federal Reserve’s decision on withdrawal of the $85-billion stimulus that it had announced in 2012.
The Fed, in its policy meeting on Tuesday and Wednesday, is expected to announce it’s widely talked about “tapering” of the $85-billion quantitative easing programme by gradually cutting its monthly purchases of assets such as government bonds by $10 billion or $15 billion.
Bank of America Merill Lynch, in its report on Monday, said that it expects the RBI to persist with the July tightening measures till December as the RBI will come to know how much the NRI deposit-cum-swap facility has raised only on November 30.
However, if the Fed tapers over $20 billion, the rupee is likely to fall from its current levels and the RBI’s monetary policy could still remain tight with no change in interest rates. “This should trigger RBI FX intervention to prevent sharp depreciation, although the rupee will likely still pierce Rs 65 per dollar again,” the report said.
According to Shenoi, “We need the $12-15 billion inflows which are expected from the FCNR swap measure taken by the RBI. This could support the rupee in case of a higher than expected tapering announcement.”
Further, if the Fed defers the tapering decision, rupee will get the much needed boost and appreciate, while the RBI could then roll back measures taken in July, especially the maintenance of 99 per cent cash reserve ratio as it is causing operational inconvenience for banks. This could kick-start to the credit demand to some extent, Shenoi said.
Irrespective of the Fed’s decision, the RBI’s decision is likely to maintain status quo with the inflation and rupee staying still above comfort levels.