RBI announces Measures to address Exchange Rate Volatility - Microsec

In a move to curb further decline in Indian rupee against US dollar, the Reserve Bank of India (RBI) has taken series of liquidity measures. The following are the steps taken by RBI-

- The Marginal Standing Facility (MSF) rate is recalibrated with immediate effect to be 300 basis points above the policy repo rate under the Liquidity Adjustment Facility (LAF). Consequently, the MSF rate will now be 10.25%.

- Accordingly, the Bank Rate also stands adjusted to 10.25%.

- The overall allocation of funds under the LAF will be limited to 1.0% of the Net Demand and Time Liabilities (NDTL) of the banking system, reckoned as INR75,000 crore for this purpose. This change in LAF will come into effect from July 17, 2013.

Moreover, the Reserve Bank will conduct Open Market Sales of Government of India Securities of INR12,000 crore on July 18, 2013.

Impact

RBI's this step will make rupee borrowings costlier owing to curb liquidity in the system. As a result, the market player will stay in rupee and provide cushion in speculative trading in the currency market which is positive for the rupee front.

However, tighten liquidity and high market interest rate may be a negative for the Banks as well as rate sensitive sectors. It may force Banks to offer higher interest rates for depositors and may find it difficult to cut the lending rates. Hence, margin may be impacted going forward.

The move also raises concerns over the easing of policy in the RBI's forthcoming Monetary Policy review.

Source : Equity Bulls

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