The RBI has hinted that it has shifted its stance towards growth and expressed that a rollback of its liquidity-control steps will be done in calibrated manner, subject to reduction in forex market volatility. It also hinted at possible rate cuts going forward, which surprised market as it was widely believed that the central bank will resort to rate hikes.
Speaking about the milder tone adopted in this monetary policy, Shipa Kumar of ICICI Bank says the Reserve Bank governor D Subbarao has managed to put a cap on the bond market yields. However, it is difficult to highlight a probable timeframe by when the liquidity-tightening measures will be withdrawn.
"Subbarao said that this is a temporary measure, it will be rolled back when rupee comes under some kind of control with structural factors changing, so this a positive comment," Kumar elaborates. She further adds, repo rate is already higher and is affecting the cost of borrowing. So, the bank look at hiking rates in a couple of months
The central bank had raised the MSF rate to 10.25 percent to curb volatility in foreign exchange, which had given wings to apprehension that the monetary policy will speak of rate hikes rather than rate cuts as banks are finding it tough.
Hemant Contractor of SBI said that the rollback depends on external factors too. He says the high-interest regime is not sustainable for a long term and a decision to raise rates will depend on individual banks’ capacity. The SBI is comfortable as of now.
Abheek Baruah of HDFC Bank says the stance of RBI has shifted in favour of growth. It is clearly emphasizing that inflation is not as much a risk as earlier. Going forward if rupee does stabilize, the RBI will get the comfort to rollback its measures.
Samiran Chakrabarty of Standard Chartered Bank says defining stability is always difficult. He quotes Dr Rangarajan in defining stability as return of capital flows. But he finds circumstances to get flows are tough. Equity inflows are clearly not a possibility, raising money through T-Bills won’t have desired affects and the only way to get them would be through sovereign bond issuance, he says. The last option will yield result by end of September, thus a rollback can happen only by then. He, however, cautions that success of dollar denominated bonds will depend on QE tapering in September.
Judging by Chakrabarty’s analysis, chances of a rollback in next one quarter is bleak.
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