Mumbai, Oct. 27: The Reserve Bank of India is likely to hike the repo rate by 25 basis points and make a similar cut in the marginal standing facility (MSF) rate in its second quarter monetary policy review on Tuesday.
The cap on bank borrowings from the repo window may also be removed.
At present, banks can only borrow up to 0.50 per cent of its deposit base from the repo window. For any further requirement of funds, the lenders have to access the marginal standing facility (MSF) window.
According to bankers and economists, RBI governor Raghuram Rajan will raise the repo rate to 7.75 per cent and bring down the MSF rate by an equal measure to 8.75 per cent to reduce the gap between the repo and MSF rates to 100 basis points. Repo is the rate at which the RBI provides short-term liquidity to banks.
Banks raise funds from the MSF window when there is an acute shortage of cash in the system.
Industry has been rooting for at least a status quo in the repo rate following a paltry 0.6 per cent growth in factory output in August against a 2.7 per cent in July.
However, bankers and economists point out to headline inflation rising to a seven-month high of 6.46 per cent in September, more than the RBI’s comfort zone of 5 per cent, which may force Rajan to hike the short-term rate.
Though the rise in inflation has been attributed to costlier vegetables, experts maintain that risks remain.
“As inflation, both WPI (wholesale price index) and CPI (consumer price index), remain elevated, and surprised on the upside last month, we expect the RBI to increase the repo rate by 25 basis points to 7.75 per cent to anchor inflationary expectations,” Morgan Stanley said in a note recently.
Leif Eskesen, economist at HSBC, said despite the weak growth backdrop, the RBI would further raise the policy rate by 25 basis points to deliver on its hawkish promise and help to anchor inflation expectations.
The RBI had raised the MSF rate by 200 basis points in July to stop the fall in the value of the rupee. However, the apex bank has since then reduced the rate by 125 basis points on two occasions following a stability in the currency.
“With the possibility of a further postponement of the tapering in the US coupled to the RBI’s objective of bringing down the corridor between MSF and repo rate to 100 basis points, the MSF rate will be reduced by 25 basis points,” a senior official of a private bank said. He added that the move would see a moderation in short-term interest rates.
The MSF rate is now the operative rate because of the restrictions on borrowings from the repo window. However, bankers maintain that the lifting of the cap will again make repo the policy rate. The move will also increase the availability of funds in the system.