RBI announces measures to address exchange rate volatility - ICICI Bank : Treasury Research

The Marginal Standing Facility (MSF) and the bank rate hiked to 10.25% from 8.25% previously and overall allocation of funds under the LAF will be limited to 1.0% of the NDTL of the banking system.

The Reserve Bank will conduct Open Market Sales of Government of India Securities of INR 120 bn on July 18, 2013.

Implication of RBI measures

Systematic liquidity:

LAF deficit is likely to increase to more than INR 900 bn in July and more than INR 1000 bn by September. The projections face upside pressure from FX intervention and if RBI continues with OMO sales post the INR 120 bn sale scheduled on 18th July

Rates Market:

In the short-term, the rates are likely to move higher amidst very tight systemic liquidity conditions. In the medium term, particularly in H2-2013, which is seasonally a high liquidity deficit period, if the measures are not rolled back, we would witness a very sharp deterioration in the liquidity conditions and upward pressure on rates.

Growth:

We expect growth to recover in FY2014. However, some of this recovery was predicated on monetary policy transmission. The announced measures leading to tightening of liquidity is effectively a reversal in the accommodative monetary policy, this is likely to have adverse growth concerns given the fact that our recovery is now nascent at best.

The monetary tightening stance is INR positive in the short run

In the near term, the policy makers' resolve to address the INR depreciation pressures may be seen in a positive light.

However, we believe that improvement in local macro economic factors is a more crucial variable to sustain appreciation bias in the INR in the medium term.

Source : Equity Bulls

Keywords