Mumbai, Sept. 5: The blockbuster debut of Raghuram Rajan as the 23rd governor of the Reserve Bank of India (RBI) has fired up expectations that the central bank will soon reverse some of its liquidity tightening measures announced since mid-July to tame the rupee.
“In the next few days, he will review all the steps taken by the RBI to protect the rupee. Some of these measures have had a negative impact and may be reversed in a gradual manner,” said a senior banker.
He added that if there were no adverse developments in the overseas markets, the policy reversal could be announced in the mid-quarter review of the monetary policy on September 20.
The RBI, under its predecessor Duvvuri Subbarao, had announced a series of steps aimed at regulating the supply of liquidity, particularly at the short-end. But the central bank now reckons that some of it has found its way into the forex markets.
It had also raised the interest rate under marginal standing facility (MSF), under which banks can obtain funds at a higher rate from the RBI, by 200 basis points to 10.25 per cent. As a result, the spread over the policy-setting repo rate expanded to 300 from 100 basis points earlier.
The RBI had also reduced banks’ access to the liquidity adjustment facility (LAF) by half when it capped the overall limit for access to the window by each individual bank to 0.5 per cent of its outstanding deposits.
LAF is a facility under which commercial banks can get liquidity if required. Conversely, they can park excess funds with the apex bank (in case of excess liquidity) on an overnight basis against the collateral of government securities, including state securities.
“To begin with, the RBI governor may restore MSF to the earlier levels and withdraw the limits placed on banks’ access to LAF. He could also do away with the higher CRR requirement of 99 per cent,” observers said.
The RBI had asked lenders to keep more money with the central bank on a daily basis as part of their cash reserve ratio (CRR) requirements. It had directed banks to maintain from the fortnight beginning July 27, a minimum daily CRR balance of 99 per cent of the requirement.
CRR is that portion of deposits that banks must maintain with the RBI. It now stands at 4 per cent.
It may be recalled that while these measures did not have the necessary impact on the rupee, it did crank up yields at the longer end of the spectrum. With bank borrowing costs rising, a few were forced to raise lending and deposit rates.
While the RBI had also put restrictions on forex outflows from domestic companies and individuals, the RBI relaxed one of the steps taken on Wednesday. On August 14, the RBI had brought down the limit for overseas direct investment (ODI) by domestic companies by nearly one-fourth. The limit was revised from 400 per cent of the networth of an Indian entity to 100 per cent of its net worth.
But yesterday, the central bank clarified through a circular that the earlier limit of 400 per cent would prevail in respect of overseas direct investments funded out of external commercial borrowings.
Experts add that some of the measures announced by Rajan on Wednesday could improve foreign exchange inflows. If that happens, it would give the RBI the confidence to gradually withdraw the liquidity tightening measures.
Siddhartha Sanyal of Barclays said any improvement in the rupee sentiment would raise the probability of the apex bank rolling back some of the liquidity-tightening measures introduced in July.