INDIA’S central bank on Monday (October 7) announced a cut in a key short-term rate in a further rolling back of emergency measures introduced two months ago to shore up the struggling rupee.
Economists said they expected the reduction in the “emergency” rate at which the central bank lends to commercial banks to improve liquidity and boost India’s struggling economy.
The announcement was the latest step by the new Reserve Bank of India (RBI) governor Raghuram Rajan, who took office last month, to return monetary policy closer to normal.
The RBI said in a website notice late Monday it was lowering the marginal standing facility rate, or MSF, by 50 basis points to 9.0 per cent following “a review of evolving liquidity conditions”.
The RBI said the decision marked a continuation of “calibrated unwinding” of exceptional measures it took in July to bolster the rupee.
The currency slid to a lifetime low of 68.85 to the dollar in August, but has since retraced some of its losses, gaining 11 per cent. It closed at 61.83 to the dollar on Monday.
The rupee has gained ground since Rajan took charge and announced steps to increase foreign capital flows into the country and bolster foreign exchange reserves.
Easing global market concerns over an end to the US Federal Reserve’s stimulus plan and attacks on Syria have also reduced pressure on the Indian currency.
Monday’s action should increase cash flow in the banking system and encourage banks to lend more to consumers as India’s religious festival season – a traditional buying period – gets into full swing, analysts said.
“These steps will reduce the cost of funds for banks and bring the monetary policy closer to normalcy,” said Shubhada Rao, chief economist with private Yes Bank.
Last month at its policy meeting, the RBI took its first step to unwind the emergency measures to support the Indian currency, cutting the MSF rate by 75 basis points.
The RBI at the same time also reduced the cash reserve ratio, the amount banks must set aside with the central bank as reserves, to 9.5 per cent from 10.25 per cent.
Rao said she believed the bank might cut the MSF rate again at its next policy meeting at the end of the month.
But analysts saw little chance of a swift reduction in the benchmark interest rate, despite appeals from business for the bank to take decisive steps to ease monetary policy and spur the economy.
The economy grew by just five per cent last year, its slowest pace in a decade, and some economists forecast expansion of under four per cent this year.
While reducing short-term rates, Rajan surprised markets at the September policy meeting by hiking the benchmark interest rate known as the “repo” to 7.5 per cent from 7.25 per cent to counter rising inflation.
“Concerns about stubbornly high headline inflation and the uncertain outlook for the rupee mean a complete reversal of the summer’s policy tightening is unlikely despite continued weakness of the economy,” said Mark Williams, economist at Capital Economics, in a note to clients.
He said another increase in the repo rate may come before year-end.
Nicknamed “The Guv”, Rajan stepped up to the plate faced with the unenviable task of propping up a weak rupee, reviving growth and curbing inflation.
Huge expectations have been riding on the former International Monetary Fund chief economist, who famously predicted the 2008 global financial crisis and who has been lionised by India’s media.
