A roll-back of restrictions on trade in exchange-traded currency derivatives and some easing of liquidity conditions by the central bank is likely to take place over the next few days following the decision of the US Federal Reserve to continue the fiscal stimulus package.
“There should be roll back of the some of the controls that were announced earlier this year,” said a senior official but warned that the clamp down on gold imports will continue through out this fiscal.
The Reserve Bank of India had banned banks from trading in currency futures and exchange-traded currency options market on their own. The measure, announced in June this year was aimed at stemming the rupee slide but may now be reconsidered, said the official.
Additionally, the RBI is also likely to make funds available for specific sectors such as small and medium enterprises that would help boost production and demand in the festive season ahead. However, an across-the-board rate cut may not be possible due to constraints of inflation that rose to a six month high in August at 6.1 per cent.
The RBI will hold its mid-quarter monetary policy review on Friday under newly appointed governor Raghuram Rajan amidst expectations of a rate cut to push up economic growth that slowed to 4.4 per cent in the first quarter of the fiscal.
But with concerns over the current account deficit continuing, the government is unlikely to go easy on gold imports.
“The restrictions on gold imports will have to continue. Financing the CAD is the key priority right now,” the official said.
Analysts have high hopes from RBI on easing liquidity
Mumbai: The US Federal Reserve decision to delay its plans to reduce monetary stimulus will give RBI Governor Raghuram Rajan considerable leeway for a partial roll-back of its liquidity tightening measures as the Fed move is set to give a big reprieve for the rupee.
“We expect the RBI Governor 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. This reprieve for the rupee should provide the RBI space to support growth,” said Bank of America Merrill Lynch in a note.
BofA-ML expects the RBI to reduce the MSF (marginal standing facility) rate by 50 bps to 9.75 per cent. “Alternatively, it could resume open market operations of Rs 12,000 crore to boost deposit growth,” BofA-ML said.
“The RBI can withdraw fully or partially some of the extraordinary liquidity tightening it had done to support the rupee including ceiling on LAF and steep hike in MSF. As a first measure it can ease MSF by 50 bps with a timeline for further reduction, consistent with the promise of transparent and predictable course of policy articulated by Rajan,” said Motilal Oswal, CMD, Motilal Oswal Financial Services.
“There is a chance that RBI may reverse partly, the monetary tightening measures it took during the second week of July 2013 and afterwards to address the currency crisis,” said V Balasubramanian, Fund manager, IDBI Mutual Fund.
ENS ECONOMIC BUREA