Monday, October 28, 2013

RBI won\'t tweak MSF; 50bps repo rate hike possible: Goldman

Since taking over in September, Reserve Bank of India (RBI) Governor Raghuram Rajan\'s priority has been to rein in inflation; he raised the repo rate by 25 basis points in his first policy on 20 September. Most market experts are betting on another 25 basis point-hike in the repo rate when the RBI reviews its monetary policy on Tuesday. Tushar Poddar, Asia Economics Research, Goldman Sachs belongs to the majority camp which is certain of a repo rate hike. Poddar has a slightly more hawkish view, and sees a 30 percent probability of the repo rate being hiked by 50 basis points. High prices of onion as well of other vegetables and fruits pushed up wholesale inflation for the fourth month in a row to 6.46 percent in September.( Read more ). Meanwhile, in a bid to improve liquidity in the system and cool short term rates, the RBI hjas been steadily reducing the marginal standing facility (MSF) rate. The MSF had been hiked to 10.25 percent in July to discourage speculative trades on the dollar. That has now been lowered to 9 percent. But this time, Poddar does not expect any action by the RBI on the MSF rate. Though RBI tone is likely to be hawkish tomorrow, it will leave the door open for further rate hikes, he told CNBC-TV18 in an interview. Along with high inflation, subdued growth is also another key concern for the Indian economy now. Poddar feels that supply-side problems continue to remain a drag on the growth front; however he expects the focus of the RBI to shift to growth once inflation expectations anchored. RBI had earlier announced a slew measures to curb the rupee\'s free fall, though the currency has stabilised, Poddar feels that this not the right time to withdraw those measures. \"Rupee has not broken 61.50/USD in a meaningful way. RBI is going to be mindful of that. I don't think that there is going to be an unwind of the dollar swap window for the oil importers anytime soon,\" he says. Below is the edited transcript of Poddar's interview with CNBC-TV18 Q: What are you expecting by way of repo and marginal standing facility (MSF) from Governor Rajan tomorrow? A: We are expecting a 25 bps hike on the repo tomorrow with about 30 percent probability that they may go for 50 bps hike on repo, which is a little bit more than what the street seems to be pricing in at the moment. I am not expecting any change in the MSF rate tomorrow. So, 25 bps hike on repo with an outside chance of 50 bps hike. Q: Will the tone be more hawkish or will it be that I am done with this 50 bps, what will the tone sound like? A: I am expecting the tone to be fairly hawkish because we are expecting the policy rate, the repo to go up to 8.5 percent. So, it would be another 75 bps after tomorrow until the end of March 2014. There could be series of rate hikes. That is clearly going to be dictated by where inflation is. Inflation has accelerated in the past few months. Inflation expectations are elevated. I don't think there is any room for the governor to come out and say that one more rate hike and that is it. He is going to leave the door open to further rate hikes and issue a pretty hawkish statement I would imagine. Q: Do you think governor Rajan may go ahead and withdraw some of the currency stabilising measures like the dollar swap window or perhaps increase the limit for borrowing under the liquidity adjustment facility (LAF), anything of that sort that you are expecting tomorrow? A: Not for tomorrow. I don't think he will confuse monetary policy and inflation control with measures to stabilise the INR, which is why we are not expecting a cut in the MSF either. If we look at the trajectory of the INR, I don't think external factors have completely gone away despite all that we have seen in terms of capital flows and swap arrangements by RBI, the rupee has not broken 61.50/USD in a meaningful way. RBI is going to be mindful of that. I don't think that there is going to be unwinding of the dollar swap window for the oil importers anytime soon. I certainly don't expect that in tomorrow's policy meeting which is going to focus solely on monetary policy.

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