RBI has reduced MSF by 50 basis points. It has sent clear
message that it is no more worried about the volatility of Indian rupee
against USD. For past couple of monetary reviews, RBI has tightened the
interest rates. The reason was to curb the usage of excess liquidity in the
market to fund for dollar based speculations.
Now that Rupee has stabilized in 61-63 level, and CAD has significantly improved, RBI has started loosening its grip on the interest rate. The result is decrease in MSF consecutively for last two revisions. At present it stands at 9%.
In order to boost growth, interest rates have to be slashed. But because of high inflation and high volatility of Rupee, RBI was forced to keep interest rates high.
Sales of discretionary items (non essential but luxury items) peak during festive season. Diwali is just a couple of weeks away. To help increase the sales and demand in market, RBI has decided to reduce MSF. The immediate effect of which would be reduced short term borrowing rates. The earlier revision of MSF was on September 20, when RBI reduced interest rate by 75 basis points.
Liquidity position in market will further improve because of the Rs 52K worth cash management bills which are due to expire between October 14 to October 22.
Related readings:
MSF:
Under this scheme, Banks are able to borrow 2% of their respective NDTL (Net demand and timed liabilities) outstanding at the end of the second preceding fortnight.
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Nice analysis Amit. However, i think RBI's idea here is not to improve liquidity among consumers at all. MSF has been reduced for a very different reason. If slashing rates to fuel growth was the be all and end all of growth stimulation, RBI wouldnt have been such an authoritative institution. Moreover, there is no symptom of RBI loosening its grip on interest rates. Rather, things have very much moved towards the "right and apt" austerity; thanks to Raghuram Rajan and his steps which deal with very basics of monetary economics.. :)
ReplyDeleteViphu thanks for the comment.
ReplyDeleteSo far I understand that in some way RBI wants to push the growth. And to do so, they have to help industries which are not showing growth. If you see the fund allocated by RBI to PSU banks to promote auto loans, two wheeler loan, it all says that they want the economic activity to increase.
Had they changed repo rate, they would have directly helped the already growing inflation, but they helped bank by increasing MSF, also by allocating pre-budget fund to automobile sector. These will help increase liquidity but without the affect of inflation.
A central bank's first and in my view, only priority is to have price stability. Unfortunately, over the past decade, RBI has talked more about growth, inflation and exchange rates rather than stability. Its good to see Rajan sir sticking to the basics. He has always stated his priority as to achieve stability. With the media, this notion is missing; so much that Rajan was initially compared to be a second Paul Volcker. whereas Rajan's planning is altogether different.
ReplyDeleteAltering MSF is a way to help the banks ONLY "to lend". This holds true only when a bank is liquid enough with deposits, but has an uncertainty of withdrawals. Repo rate is a numb way of changing things as of now. It will regain its significance once the game plan of the guv kicks in. This guv has a very different game plan, and surprisingly what makes it different is the fact that he is preferring to stick to the fundamentals which has been a matter of oblivion for most of the economies. :)