India: Reserve Bank of India scales back liquidity tightening
October 7, 2013
On 7 October, monetary authorities announced that they would scale back the emergency measures introduced in July of this year that were aimed at protecting the rupee's fall. The Reserve Bank of India (RBI) decided to reverse the tightening measures in order to increase liquidity in the banking system, cutting the Marginal Standing Facility (MSF) rate by 50 basis points to 9.00%. The intention of this move, which followed a 75 basis-point cut at the 20 September monetary policy meeting, is to narrow the differential between the MSF rate and the repurchase rate - currently at 7.50% - to 100 basis points and thus return to the normal monetary policy framework.
When the Indian rupee hit uninterrupted record-lows in mid-July, the Central Bank announced a series of extraordinary tightening measures, which included hiking the MSF rate by 200 points to 10.25% (and limiting the bank's repo borrowing to the equivalent of 0.5% of their liabilities. The RBI raised the repurchase rate by 25 basis points to 7.50% at its 20 September monetary policy meeting, a move that is aimed at containing rising inflation. In addition, at the next monetary policy meeting scheduled for 29 October, market analysts expect the RBI to hike the repo rate by another 25 basis points and lower the MSF rate further in order to return the gap between the two rates to 100 basis points.
The majority of FocusEconomics Forecast panelists are taking the recent developments into account. As a result, the panel projects an average forecast of 7.06% in the repurchase rate at the end of fiscal year 2013/14.
Author: Ricardo Aceves, Senior Economist