RBI governor Raghuram Rajan in Mumbai on Friday. (PTI)
Mumbai, Sept. 20: The Reserve Bank of India (RBI) today tried to soften the impact of a surprise hike in the repo rate when it trimmed the marginal standing facility (MSF) rate by 75 basis points to 9.5 per cent, a move that is expected to ease the cost of borrowings for banks.
MSF is a window from which banks can raise overnight funds from the RBI to the extent of 1 per cent of their net demand and time liabilities. It is usually treated as a penal rate for desperate borrowers and the window is largely seen as a borrowing of last resort. On Thursday, banks had borrowed Rs 81,084 crore from this window.
The cut in the MSF rate, which former governor Duvvuri Subbarao had suddenly raised in July in an attempt to make liquidity dearer to end the volatility in the rupee-dollar exchange rate, stands revised to 200 basis points above the repo.
The repo is the rate at which the RBI provides liquidity to banks. It has been raised by 25 basis points to 7.50 per cent.
In July, the central bank had raised MSF to 10.25 per cent (when the repo rate was at 7.25 per cent) — placing it 300 basis points above the policy rate. Earlier, MSF was only 100 basis points above the repo.
In its mid-quarter review of the monetary policy today, the RBI said it had decided to ease some of the measures taken since July in a “calibrated manner”. It added that as a first step, the MSF rate was being reduced by 75 basis points.
Later, Rajan told reporters that the central bank’s intention was to bring down the difference between MSF and the repo rate to 100 basis points. Although this can be achieved by bringing down the MSF rate further, Rajan hinted that this could also be done by raising the repo rate.
The RBI governor expressed the hope that the reduction in the MSF rate would lower the cost of funds for banks, which could have a salutary effect on growth.
Of late, banks have been accessing the MSF facility as the RBI had capped their borrowings from the repo window to 0.50 per cent of their outstanding deposits on the last Friday of the second preceding fortnight.
In the run-up to Friday’s monetary policy review, the inter-bank call money rate (the rate at which banks borrow from each other) was 10.26 per cent yesterday, marginally above the old MSF rate. Analysts feel that the reduction in MSF could lead to lower call money rates.
“As the MSF rate has been reduced to 9.5 per cent, the call money rate will fall and fluctuate between the liquidity adjustment facility (LAF) corridor of 6.5 per cent and 9.5 per cent,” India Ratings said in a note.
The RBI also took another liquidity-easing move when it relaxed the daily maintenance of the cash reserve ratio (CRR) to 95 per cent from 99 per cent earlier. CRR was left unchanged at 4 per cent.
CRR is that portion of bank deposits that must be maintained with the RBI.
On July 23, the RBI had raised the daily CRR limit to 99 per cent from 70 per cent to ensure that there was no liquidity overhang in a market that could seep into forex markets and send the rupee plunging against the dollar.
By trimming the daily CRR rate to 95 per cent, the RBI is cutting the slack for banks ever so slightly.
Rajan said the timing and direction of further action on the liquidity tightening measures taken in July would depend on exchange market stability and “can be two-way”. He added that the central bank was not contemplating any further reduction in the minimum daily maintenance of CRR.