Now better prepared for Fed taper: RBI guv Rajan

Moneycontrol Bureau

Reserve Bank of India governor Raghuram Rajan cautioned Indian markets against celebrating the US Fed decision not to cut back on its bond purchases. At the same time, India is now better prepared for the expected cut in Fed bond buying, whenever that happens, he said. He was speaking at the post-monetary policy press conference.

In its mid-quarter policy review today, the RBI raised the benchmark repo rate by 25 basis points to 7.5 percent, but reduced the the marginal standing facility (MSF) rate to 9.5 percent from 10.25 percent earlier. Both are windows for banks to avail of short term funds from the RBI.

This move is expected to provide some relief to banks which depend on wholesale funds. That is because in July, the RBI had reduced the quantum of funds that could be borrowed through the repo window, forcing banks to borrow the excess requirement through the MSF window.

Rajan said, however, the RBI was not contemplating any reduction in cash reserve ratio, saying “CRR was peanuts in the overall scheme of things.” Also, he said banks were exaggerating problems being caused by the recent tightening of CRR norms. The RBI today reduced the minimum daily maintenance of CRR from 99 percent to 95 percent, but most bankers said that did not amount to much.

He said he expected banks to set lending rates “appropriate to their cost of funding.” But it looks unlikely that banks will reduce their lending rates anytime soon, given the struggle to attract deposits.

Less than two days before the RBI policy, India’s largest lender, State Bank of India increased its deposit and lending rates.

Rajan said it was wrong to assume that the central bank was focusing on inflation at the expense of growth, but expressed confidence in bringing down inflation without having to resort to aggressive measures.

Rajan said the RBI would look at bank and corporate distress over the next few weeks. The RBI measures to drain liquidity in the system to help protect the rupee have caused short term rates to surge. Rajan said this would be corrected as the July measures were gradually reversed.

He said the government’s austerity measures have given confidence to the RBI that red lines (referring to fiscal deficit) would not be breached. Rajan said the RBI was confident of being being able to finance the current account deficit without having to draw down on its forex reserves. He further said there could be an addition to reserves if everything went well.

The RBI had recently opened a window to directly sell dollars to oil marketing companies so that they did not buy those from the open market and put further pressure on the currency. Rajan said this window will be gradually closed.