India’s central bank rolled back further an emergency step taken to shore up its currency as the rupee’s continued stabilization allowed it to relax liquidity for the nation’s banks.
Governor Raghuram Rajan lowered the marginal standing facility rate to 9 percent from 9.5 percent, the Reserve Bank of India said in a statement yesterday, the second cut in less than a month. The benchmark for monetary policy, the repurchase rate, was left at 7.5 percent. Rajan raised the repo rate last month to fight elevated inflation.
The rupee has climbed about 12 percent versus the dollar since reaching a record low in August, among the world’s best performers in that time, boosted by Rajan’s steps to attract inflows of the U.S. currency. The governor, a former International Monetary Fund chief economist, took over at the RBI in September and has said he plans a measured rollback of liquidity curbs imposed on the banking system in July.
“The rupee’s trading strong so they’ve got a very good window of opportunity to unwind some of these quantitative tightening measures,” said Mirza Baig, head of foreign-exchange and interest-rate strategy at BNP Paribas SA in Singapore. Rajan is “saying the right things and he’s being more orthodox in terms of how he’s running monetary policy,” he said.
The currency appreciated 0.2 percent to 61.65 per dollar as of 10:35 a.m. in Mumbai. The S&P BSE Sensex index of stocks rose 0.9 percent. The yield on the 10-year bond maturing May 2023 decreased to 8.51 percent from 8.68 percent yesterday.
Cutting the MSF rate will help put the focus on the repo rate as the benchmark, Baig said.
The MSF borrowing cost will probably be reduced by a quarter of a percentage point at the policy review due Oct. 29, Kotak Mahindra Bank Ltd. said. The repo rate will be boosted by the same magnitude at that meeting, Kotak added.
The impact of yesterday’s decision on the Indian rupee is “ambiguous,” Sean Callow, a Sydney-based senior currency strategist at Westpac Banking Corp., wrote in a research note. While easier monetary conditions could attract foreign inflows to stocks, they also reduce “the yield support for the rupee,” he said.
Rajan offered concessional swaps for banks’ foreign-currency deposits and borrowings to encourage them to raise dollars after taking over at the RBI. That spurred the rupee’s recent gains, helping to pare its drop in the past 12 months to about 16 percent.
The U.S. Federal Reserve’s decision to postpone tapering of monetary stimulus has also aided the rupee, said Tirthankar Patnaik, a Religare Capital Markets Ltd. strategist in Mumbai.
The RBI, which also lowered the bank rate to 9 percent, will provide additional liquidity to the banking system, according to yesterday’s statement. The decisions came between scheduled policy reviews.
Rajan faces the challenge of guiding a slowing economy where consumer-price inflation is almost 10 percent. Gross domestic product growth will cool to 4 percent in the fiscal year ending March 2014, according to HSBC Holdings Plc. That would be the weakest pace in more than a decade.
Rajan’s predecessor Duvvuri Subbarao increased both the MSF and bank rates by 200 basis points in July to try and contain the drop in the currency, which has been weighed down by a current-account deficit, price pressures and slowing growth.
The gap between the MSF and repo rates will eventually be lowered to 100 basis points, Rajan said on Sept. 20 in his first policy review. He reduced the MSF rate by 75 basis points that day, while increasing the repo rate by a quarter point and pledging to fight inflation.
“There’s less need to maintain the interest-rate defense with the currency stabilizing,” said Shubhada Rao, chief economist at Yes Bank Ltd.
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