Mumbai, Sept. 19: Reserve Bank governor Raghuram Rajan has a weight off his shoulders — and he has US Federal Reserve chairman Ben Bernanke to thank.
Rajan, who took over as governor on September 4, had put off his maiden monetary policy review by two days to give time to react to any tapering decision that the Fed might take on its $85 billion a month bond-buying programme.
The Fed not only decided to continue with the cheap money policy but also set no timeline for a review of the programme, giving Rajan the headroom to adopt a few accommodative measures tomorrow.
On the day he took over, Rajan had stunned everyone by announcing a raft of measures. Banking circles expect the RBI governor to continue that momentum in Friday’s mid-quarter review of the monetary policy.
To begin with, it is expected that the central bank will withdraw some of the liquidity tightening measures that the RBI had taken in mid-July. The central bank had then 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.
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 obtain liquidity in a crunch. Likewise, 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.
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.
Banking circles feel that as the domestic currency is expected to stabilise in the near term due to the overseas developments, tomorrow’s monetary policy could see Rajan trim the MSF rate from its current level of 10.25 per cent.
“He could bring down the spread over the repo rate by 100 basis points to 200 basis points,” said a senior official with a nationalised bank. The official added that the RBI could also do away with some of the higher CRR requirements and bring it down to below 90 per cent, a measure that would give some liquidity comfort to banks.
Bankers, however, do not expect the RBI to make any changes with regard to banks’ access to the LAF.
Observers, however, add that those looking forward to a reduction in their home loan rates may be disappointed tomorrow as the mid-quarter review may not cut the repo rate at a time inflation has climbed to a six-month high of 6.1 per cent.
The repo rate is that at which the RBI provides liquidity to banks. It now stands at 7.25 per cent.
The bond and stock markets will also be keenly waiting to see the RBI’s outlook. Many reckon that the overnight developments could see the central bank giving out a dovish guidance.
At the same time, optimists feel that Rajan could also announce more steps to benefit the banking sector.