Analysts see another repo hike on Oct 29

Welcoming RBI's liquidity infusing moves wherein it cut MSF by 0.50 per cent and introduced a term repo window, analysts today said this in no way reflects a shift in the stance and the market must expect a repo rate hike at the next policy review later this month.

"At the October 29 policy, we expect the RBI to cut the MSF (marginal standing facility) rate by a further 0.25 per cent, but hike the repo rate by 0.25 per cent to contain inflation expectations," brokerage firm Bank of America Merrill Lynch said in a note.

Governor Raghuram Rajan's move to cut the MSF rate, at which banks borrow if they exceed their repo borrowing limits, by 0.50 per cent to 9 per cent should not be construed as a reversal in his policy stance and is more of a normalising measure, Citi said in a note.

It expects a cut of up to 0.25 per cent more in the MSF rate and a hike of up to 0.50 per cent in the repo rate by December.

"Further policy rate hikes are, therefore, in a sense a pre-condition for any further roll-back in the currency stabilisation measures to ensure that the monetary stance is appropriately calibrated to contain domestically and externally sourced inflation pressures," HSBC said.

To defend the depreciating currency, the RBI had taken a series of unconventional measures mid-July, including limiting the banks' borrowing under the repo window to 0.50 per cent of their liabilities and increasing the MSF rate by 3 percentage points to take the difference between the repo rate.

The measures did not have the desired impact on the currency, but pushed up rates in the system.

At his first policy review on September 20, Rajan cut the MSF by 0.75 per cent and increased the repo rate by 0.25

per cent to anchor inflationary pressures.

The gap between the repo and the MSF rates reduced to 2 per cent as a result of the moves and further narrowed to 1.50 per cent, following Monday's cut.

Without specifying which of the two rates will do more walking, Rajan had said he wanted to narrow the gap between the repo and the MSF to the normal one percentage point.

"Going forward, we expect that the RBI will further roll back the currency stabilisation measures, but also raise the repo rate to anchor inflation expectations.

“More liquidity measures are also expected," HSBC said in a note.

It added with the rupee stabilising in the 61-62 levels since September, the RBI is more comfortable about the currency, but concerned over the liquidity conditions.

The RBI also said it would be injecting additional liquidity through 7 and 14 day term repos.

"RBI's Monday action reflects the stability of the rupee around 61-62 to the US dollar and increased demand for liquidity as people withdraw cash from the banking system during the festival season," India Ratings said in a note.

Some analysts also point to the onset of the busy second half of the fiscal which generally witnesses a higher credit pick-up as a factor which RBI would have considered.

India Ratings said the move is positive for the banks, as it will help them widen the net interest margin, which had come under pressure following hardening of rates.

Bank of America Merrill Lynch said yesterday's measure are positive for banks, especially the smaller ones with lower percentage of low-cost current and saving account deposits.