RBI cuts MSF rate by 50 bps and announces additional liquidity measures

As part of calibrated withdrawal of extraordinary measures,

1. RBI reduced the MSF rate by 50 bps to 9.00%  
2. Provide additional liquidity through term repos of 7 days and 14 days for a notified amount equivalent to 0.25 per cent of NDTL of the banking system through variable rate auctions on every Friday beginning October 11, 2013.

NDTL 76.17 Lac Crore

Additional liquidity 19,000 Crore

Recent liquidity infusion through OMO 9,974 Crore

This will have the effect of bringing the short term rates lower and steepening of interest rate curve. RBI is drawing comfort from current levels on the USDINR (@ 61.80 on close of 08th October 2013) and external situation (US Govt shutdown, downside risks to growth and delay in tapering). In less than 2 weeks, RBI has reduced MSF rate by 125 bps which means it is looking to gradually unwind money market measures (relaxing the cap on allocation of funds through LAF @ 0.50% of NDTL and daily maintenance of CRR) and close the swap window with Oil companies. RBI is doing a S/B swap with Oil Cos and a B/S swap on the FCNR deposits. Total funds mobilised under the swap facility has been close to $5.70 bn. India's import of petroleum and related products monthly is USD 14 bn. This swap window has to be withdrawn in a timely manner and once that happens the demand will flow into the market and one could see demand pressures building up.

For 09th Oct 13, sensex is likely to rally. This move could be seen as a semblance of normalcy in the forex market which could bring cheer to the market. However, if market interprets it as steps in the direction of unwinding of measures ahead of policy on 29th Oct, traders may try to go long. The latter scenario seems a little unlikely. Let's see what happens!!