RBI may cut MSF by another 75bps in next 3 months: HSBC

Leif Eskesen of HSBC Global Research believes the Reserve bank of India will further rollback the remaining 75 bps marginal standing facility (MSF) within the next three months after cutting it to 9.5 percent from 10.25 percent, last week. He also expects the central bank to hike repo rate once more by 25 bps given the same time frame.

Speaking to CNBC-TV18, Eskesen says that instead of RBI briefly rolling back the liquidity tightening measures, he would have been more inclined to continue with those measures unless there was confidence regarding the currency stabilisation.
Eskesen further adds that whenever the US Fed will announce tapering, it is likely to put pressure on the emerging markets on the downside, especially India, which has high current account deficit. Below is the verbatim transcript of Leif Eskesen’s interview on CNBC-TV18 Q: What was your reaction to Reserve Bank of India (RBI) monetary policy? A lot of people are saying it was rebalancing, some want to read into that marginal standing facility (MSF) move, some want to read into the repo move. What is your own call regarding the policy?
A: It was certainly a careful balancing act. The motivation for the rollback in the liquidity tightening measures was clear. There has been some stabilisation in the rupee in recent sessions following both the steps that have been taken in India to curb the current account deficit (CAD), bringing in more capital flows and also the Fed holding of in terms of tapering.
I would have been more inclined to keep on to these currency stabilisation measures a little longer to make sure that this stabilisation is secured but at least what the RBI did in this context was they said any further moves in these currency stabilisation measures can be two ways. In other words, if pressures on the currency were to re-emerge, the RBI has signaled its willingness to begin to tighten them again if there will be need. It helps anchor expectations about the currency and so, that was balanced relatively well.
What I was quite encouraged by was the hike in the repo rate and also through the relatively hawkish statement when it comes to the inflation picture, we were quite encouraged by what RBI did. They seem to be looking at inflation as a key objective. It has always been an objective but in their communication about why they are doing what they are doing, a lot of that is centered around inflation, which was a positive and a strong signal for the RBI. Q: What is your expectation on the MSF as well as the repo possibly by the end of FY14? How do you expect the RBI to move on both of them?
A: We will see more of the same essentially. We will continue to see stabilisation in the currency, it doesn’t mean it cannot depreciate but the degree of volatility, the degree of biasness in volatility changing, could potentially pave the way for them to cut the MSF rate by another 75 bps.
Whether that will happen in one go and whether that would happen before the next monetary policy meeting, very much depends on what happens to the currency in between which is dependent on both what we see in trade numbers coming out and also in terms of what global financial conditions will do going forward. But there is a good chance that we will get a further rollback of the remaining 75 bps within the next three months in the MSF rate.
Over the same period, I would also expect the RBI to raise repo rate atleast once, further by 25 bps. So you would have reduced the spread between the MSF rate and the repo rate by 100 bps and you can say that the monetary policy framework has been re-normalised at around the conditions it would normally set in. In terms of making the repo rate then the operational rate, you will most likely have to make some adjustments to liquidity, make available to help facilitate that. So, those are the broad trends I would expect over the next couple of months. Q: What is your call now on the kind of recovery that we have seen not just in India but other emerging markets and the fact that Fed has delayed its QE tapering but we know at some point the taper will come? Is there a risk that some of these currencies will go back to their previous lows or do you think we have put a bottom as far as Indian currency is concerned?
A: In the near term with Fed tapering not likely going to kick in until December or for that matter early next year, I think that would provide some calm to markets here. But it is not a matter of if, it is a matter of when the Fed tapering will begin. So, at the time it does begin it could potentially put downward pressure on currencies again. May be not to the same extent we saw initially but to some extent some downward pressure on currency especially in case of India, where CAD is still quite high, we have issues with inflation pressures and it also depends on domestic factors centered around fiscal policy. Will fiscal policy begin to move in the right direction, will some of the risks that surround the fiscal outlook have increased the decline at that point in time?
It depends both on how markets react to Fed tapering when it starts, global conditions there and whether we continue to see progress on the domestic policy front in India between now and then. The balance of risk for the currency is still tilted a bit to the downside and so, we could still see some weakening of the currency over the next 15 months or so but the extent of that is very much dependent on what happens on the domestic policy front.