Millennium Post

1st test today: Will Rajan bat for India or India Inc?

All eyes are on new Reserve Bank governor Raghuram Rajan who will come out with his maiden monetary policy review on Friday amid conflicting demands for rate cut and an urgent need to contain inflation which soared to 6-month high of 6.1 per cent in August.
Much to Rajan's comfort, the US Federal Reserve has decided against tapering its monetary stimulus - under which it has been buying assets worth $85 billion every month - giving him space to go ahead with steps to arrest declining economic growth.
The positive impact of the Fed decision on stock and currency markets on Thursday will have a bearing on Rajan's policy announcements, which was pushed back by two days in view of the Fed's crucial meeting on Wednesday .Bankers and industry have continued to pitch for lowering of rate and easing of liquidity ahead of the mid-quarter review of the monetary policy for 2013-14.

'We have made our recommendations for releasing the liquidity, making it more accessible, making it less expensive,' State Bank of India (SBI) chairman Pratip Chaudhuri said.

'We have recommended a cut CRR, repo rate and asked RBI not to restrict the MSF to a particular number. Whatever excess SLR banks hold that should be available for MSF (marginal standing facility),' he said.

Other experts, however, are of the opinion that Rajan will maintain status quo in view of rising inflation.
'I do not expect any change in the key interest rate tomorrow,' said D K Joshi, chief economist at credit rating agency Crisil.
While BSE 30-stock index, Sensex, soared over 684 points or 3.4 per cent to 20,646.64 today, the rupee gained 158 paise to trade at over one-month high of 61.80 against the dollar following US Fed's status quo stance.  

The US Federal Reserve, in a surprise move on Wednesday, maintained the pace of its monthly purchases of $85 billion of treasuries and mortgage-backed securities.

The Federal Open Market Committee (FOMC) was widely expected to reduce this stimulus to spur the American economy, after Fed chairman Ben Bernanke hinted of a roll back in May.Back home, analysts and market participants are keenly awaiting some announcement on rolling back of liquidity tightening steps announced in July to stem the rupee's free fall against overseas currencies, particularly the US dollar.
RBI had raised bank rate and MSF to banks by 2 per cent to 10.25 per cent making loans costlier in its bid to contain the rupee slide.
Introduced during the 2011-12 period, MSF allows banks to borrow money from the central bank at a higher rate when there is significant liquidity crunch.

'We think this tightening of the liquidity and making it more expensive of course may have been helpful in containing or arresting decline of rupee but it has its collateral cost in terms of growth of economy,' Chaudhuri said.
Indian Overseas Bank chairman and managing director M Narendra said: 'It is our wish that RBI reverses liquidity tightening measures taken recently so that loans become cheaper.'

With peak festival season around the corner, demand for loans is expected to go up and banks would be able to disburse loans at the lower rate if RBI cuts rate, Narendra said.

A report by Bank of America Merill Lynch said: 'We expect a relaxation in Liquidity Adjustment Facility (LAF) limit to 1 per cent from the current 0.5 per cent.'
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