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Will the RBI cut or hike rates?

October 24, 2013 11:56 IST

At a time when the rupee is stabilising and inflation is rising, the Street expects the Reserve Bank of India’s (RBI’s) monetary policy review next Tuesday to make short-term borrowing cheaper through a further cut in the marginal standing facility (MSF) rate, while raising the repo rate to contain inflation.

A 25-basis-point MSF rate cut and a repo rate hike in an equal measure will restore the 100-basis-point corridor between the two rates, say treasury officials, economists and fund managers.

The MSF rate was cut by 25 basis points in May. But, in mid-July, RBI had raised the MSF rate to 10.25 per cent, from 8.25 per cent earlier, to arrest volatility in the rupee’s value against the dollar. 

Later, RBI had cut the rate by 75 basis points in the mid-quarter review of its monetary policy last month, and then by another 50 basis points earlier this month.

On the other hand, the repo rate was cut by 25 basis points in May and then raised by 25 basis points in the mid-quarter review of the monetary policy last month.

The repo rate currently stands at 7.50 per cent and the MSF rate at nine per cent — a corridor of 150 basis points. 

“The corridor between the two rates would again be 100 basis points if the MSF rate is cut by 25 basis points and the repo rate is raised by 25 basis points,” said Mohan Shenoi, president (group treasury & global markets), Kotak Mahindra Bank.

The previous cuts in the MSF rate has helped to bring down short-term rates from double digits to a single digit. “MSF rate will be cut so that the overall short-term credit cost comes down further,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank, and chairman of the Fixed Income Money Market and Derivatives Association of India.

The Street believes the MSF rate will continue to be the operative rate for some more time. “MSF rate might be cut by 25 basis points. It will be the operative rate for some time, probably because there still is volatility in the rupee, albeit less since August. RBI will be a little cautious. Inflation is running very high, due to which the repo rate might be raised 25 basis points,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund.

The rate of Wholesale Price Index (WPI) -based inflation stood at a seven-month high of 6.46 per cent in September, compared with 6.1 per cent the previous month.

The Consumer Price Index (CPI) -based inflation in the month, on the other hand, rose at 9.84 per cent, a rate higher than expected, compared with 9.52 per cent in August.

Governor Raghuram Rajan had said in RBI’s policy review last month that the corridor between the repo and the MSF rates would be gradually brought back to 100 basis points.

But there are a few experts who do not expect any change in the repo or MSF rate next week. 

“I am not expecting a cut in the MSF rate. RBI had said these were temporary measures till the rupee stabilised. I would think the first step might be bringing the demand from oil companies back into the system and then seeing whether the rupee was still stable. Only then, the measures would be rolled back,” said Pradeep Madhav, managing director, STCI Primary Dealer. He does not expect any change in the repo rate, either.

Neelasri Barman in Mumbai