The Reserve Bank of India on Monday cut the marginal standing facility (MSF) rate by 50 bps to 9 percent . Speaking to CNBC-TV18 on the central bank moves going forward, Samiran Chakraborty of Standard Chartered says there is no harm if the RBI waits for the inflation data on Friday and Monday. Though, he adds, that a hike in repo rate is likely in October.
However, Manoj Rane of BNP Paribas feels a couple of moves prior to a repo rate hike are still left. The RBI should make the repo rates operative rate again and get oil marketing companies (OMCs) back in the market from where they have been currently taken out.
Below is the verbatim transcript of the experts' reaction to the RBI's steps.
Samiran Chakraborty, Standard Chartered
Q: How does this marginal standing facility (MSF) cut impact the market? Tomorrow are we going to see an impact on the 10-year bonds as well on long-term paper or will the impact be felt only in the short term?
A: The bigger impact is going to be on the shorter end and then we were anticipating the curves to steepen and that anticipation will play out in the very near-term. For the longer end the two issues that will be very important are, what will be the signal on the repo rate and how much fiscal slippage we see, but that we will see a little later, not immediately.
Q: There are some entities in the financial system, non-banking financial companies (NBFC), but also some smaller banks that depend on raising money through certificate of deposits (CD) or commercial papers (CP). Would you suspect that they are all going to pay about half a percentage point less, they are all going to be a bit better off from tomorrow?
A: Absolutely. The stress on systemic liquidity will be less with the MSF rate coming down by 50 bps. As of now, there is no announcement of any significant liquidity injection other than the open market operations (OMO) that we have seen. So, it is the cost of liquidity which will come down, but not the quantum of liquidity which is going to go up.
Q: What can be the next move by RBI? Is a repo hike still possible in the next policy or would you wait to watch the inflation numbers on Friday and Monday?
A: There is no harm in waiting for the inflation numbers and seeing how much it is reflective of inflationary pressures increasing at least in a momentum sense. Overall, we are still of the camp that we are going to see a rate hike in October as well, particularly since the consumer price index (CPI) has got a lot of attention from the new governor and it continues to remain very high. The quickness, with which he is reducing the MSF rate, indicates that on repo rate side as well he will be quite quick to react to the inflation risks.
Tirthankar Patnaik, Religare Capital
Q: What will be the equity market's reaction tomorrow?
A: It is going to be very positive. Clearly, liquidity has been eased at the near end of the curve and the offer of 7 day and 14 day repos to the tune of about 25 bps of the net demand and time liabilities (NDTL) adds nearly Rs 18,000-20,000 crore at the margin and so clearly this is a big positive. Yes Bank , IndusInd Bank , a lot of NBFCs are likely to see big jumps in the market tomorrow.
Q: Would banking stocks in general do better, should there also be mark-to-market (MTM) gains?
A: Yes, definitely. One would expect the entire banking pack to do better. Today, banks have started out quite weak, but over the term of the day we saw banking stocks pick up which should see a return tomorrow. What is interesting is that the Reserve Bank of India (RBI) has not really removed the limits on the overnight funding rates at the repo.
At this point you will still have to see what happens at the overnight rate. It is not as if the system was borrowing huge amounts at the MSF over the last couple of days. After the advance tax numbers had come up MSF borrow had come off from about Rs 90,000 crore odd to barely Rs 40,000-45,000 crore. In terms of easing liquidity, I am not sure if the central bank really saw this as a point. It is not as if the system was really borrowing a lot.
Manoj Rane, BNP Paribas
Q: Do you think the rupee will be able to weather this with equanimity the fact that all these money market crutches are going away for the rupee?
A: Several of us have been urging RBI to ease back specifically the very short term liquidity tightness. They had created it. It was a bit of a self goal, given the fact that it had very little to do with the currency speculation. That has really been proven and accepted at RBI.
I am impressed with the alacrity with which the new regime at RBI has moved because the 100 basis points reduction was only last week and one would have felt that they would have done a calibrated reduction down to moving entirely to repo.
The very fact that they have acted so fast is heartening. Markets will take comfort from the fact that they are very responsive to whatever they perceive as correct and whatever feedback they get from the market.
Q: What do you expect is the next move from RBI?
A: We are couple of moves prior to a repo rate hike which might happen at some point based on data. But the first two moves are, one, to make the repo rates operative rate again which is to make the MSF rate as irrelevant by removing the cap. The second one is to get the oil marketing companies back into the market from where they have been currently taken out.
Q: Do you expect this to come before the October 29 policy? You think they will be able to remove that 50 percent cap?
A: I would be surprised if it doesn't come before the October 29 policy.
