In a bid to restore stability in the foreign exchange market, the Reserve Bank of India (RBI) has hiked the marginal standing facility (MSF) rate to 10.25 per cent, a rise of 200 basis points from the current level of 8.25 per cent.
This decision by the RBI late Monday evening, which comes on a day finance minister P Chidambaram met Prime Minister Manmohan Singh and RBI governor D Subbarao to take stock of ways to stabilise the falling rupee, mean that banks will have to pay more interest on their overnight fund requirments.
The RBI will conduct open market sales of government securities of Rs 12,000 crore on July 18, 2013.
The RBI has also increased bank rate — the rate of interest which RBI charges on the loans and advances that it extends to banks — to10.25 per cent from 8.25 per cent from with immediate effect.
This would potentially push up the cost of funds for the entire banking sector as a whole, with the key short-term market rates — call money rates, CBLO (collaterised borrowing and lending obligation) — slated to move up in tandem with the hike in the rates signalled by the central bank, creating fresh worries for banking sector players. Under the MSF facility, introduced by the RBI two years ago to regulate short-term asset liability mismatches more effectively, banks can borrow funds overnight from the RBI against pledging government securities. The revised MSF rate is now 300 basis points above the policy repo rate — 7.25 per cent currently — under the liquidity adjustment facility (LAF).
In the MSF window, banks can use the securities under statutory liquidity ratio (SLR) to get loans from the RBI. The hike has come after the volatile rupee fell by 6.19 per cent since June 1 and the forex reserves declined in the last a few months. The RBI move to hike MSF indicates the possibility of status quo or even a monetary tightening in the worst scenario in the next review.
Hiking the MSF rate, the RBI said the market perception of likely tapering of US Quantitative Easing has triggered outflows of portfolio investment, particularly from the debt segment. “Consequently, the rupee has depreciated markedly in the last six weeks...,” the RBI said in a statement.
Putting further curbs under the LAF, the RBI announced that the overall allocation of funds under the