KOLKATA/MUMBAI: Reserve Bank of Indiagovernor Raghuram Rajan may keep interest rates intact in his first monetary policy announcement after taking over from Duvvuri Subbarao but scale back some of the liquidity tightening measures taken by his predecessor to stem the fall of the rupee, especially since the Federal Reserve has surprised the world by maintaining its quantitative-easing programme.
Local market sentiment improved dramatically after the Fed announcement and expectations are high that RBI will take measures to ensure the smoother flow of liquidity to make money supply available for productive purposes. The monetary policy announcement is due at 11 am on Friday. Rajan took over as governor on September 4.
The central bank is not expected to lower the short-term repo rate at which banks borrow funds from it since the growth-inflation dynamic remains weak. Market participants were almost unanimous about this, basing their contention on RBI's belief that lowering the repo will addpressure on prices. Food inflation in August touched 18.2%.
The rupee gained 2.5%, or 150 paise, to 61.84 a dollar and the Sensex zoomed 685 points to 20,646.64 points after the Fed decision. Bonds yields eased, with the benchmark 10-year government paper falling to 8.14%, its lowest since August 8. It closed 18 basis points lower at 8.19%. Given the current dovish outlook and the appreciation of the rupee and other Asian currencies following the announcement, most Indian financial market participants expect a lowering in the marginal standing facility (MSF) rate and the daily cash reserve balance requirement, which had been tightened to prevent the speculative use of the rupee for buying dollars.
"We expect governor Raghuram Rajan to partially roll back July tightening measures after the US Fed expectedly deferred tapering. Our US economist, Ethan Harris, continues to expect the Fed to taper December onwards. The reprieve for rupee should provide the RBI space to support growth," said Bank of America Merrill Lynch chief economist in India, Indranil Sengupta.
State-run Uco Bank's chairman and managing director Arun Kaul said: "After FOMC's decision, we expect some measures from RBI to ease liquidity situation and reduce the shorter end of yield curve."
Most market participants that ET spoke to expected RBI to reduce the MSF rate by 100 basis point to 9.25% and ease the cash reserve ratio daily balance to 90% from 99% with a road map to lower it further to 70%.
However, a section of the market sees the RBI taking a more cautious approach. "It's a close call, especially after the Fed decision earlier this week. The RBI is indeed very close to start rolling back the liquidity measures. However, ideally the currency markets should stabilise for a bit longer before that happens," said Siddhartha Sanyal, chief India economist, Barclays. His firm does not expect RBI to act in a hurry on Friday.
"We expect gradual easing of liquidity situation by RBI in terms of daily cash reserve balance and MSF rates," Yes Bank's senior president and chief economist Shubhada M Rao said. "But given the persistence of macroeconomic weaknesses in GDP growth and inflation dynamics, there may not be any quick reversal of the short-term interest rate stance."
CARE Ratings chief economist Madan Sabnavis agreed. "There could be rollback of some liquidity tightening measures. But RBI may not do anything in a hurry in terms of policy rates as FOMC said it would review its stance on tapering at a later date."
Dun & Bradstreet senior economist Arun Singh expects the RBI to maintain the status quo in the Friday policy announcement.
Sengupta of Bank of America Merrill Lynchadded: "We expect the RBI to reduce the MSF rate by 50 bps to 9.75%. "