Primer on Market Stabilisation Scheme and Liquidity Management-VRK100-02Dec2016

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Primer on Market Stabilisation Scheme 

and Liquidity Management

After a gap of six to seven years, MSS has become a buzzword in the financial space once again. Government of India today, based on the recommendation of the  Reserve Bank of India, raised the MSS ceiling for financial year 2016-17 to Rs 600,000 crore from Rs 30,000 crore fixed earlier. The steep increase in MSS ceiling is necessary as banks have been receiving large amount of deposits following the currency ban on Rs 500 and Rs 1,000 bank notes with effect from November 9th.

So what is MSS? Simply put, MSS is an acronym for market stabilisation scheme. MSS is used by country's central bank RBI as a monetary policy instrument for liquidity absorption and/or injection. RBI already uses other tools like LAF Repo, Reverse Repo and CRR. Why doesn't RBI use these tools instead of MSS? What is the impact of MSS on fiscal deficit?  I will try to answer them in this write-up.

1. What is MSS?

The Market Stabilisation Scheme (MSS) in an innovative sterilisation tool  introduced by the RBI in 2004. It basically deals with the liquidity impact of surging capital flows, such as foreign direct investment (FDI) and foreign portfolio flows (FPI).

The MSS is an instrument for active liquidity and monetary management, in addition to other tools such as LAF repo rate, reverse repo rate and bank rate. It has enabled RBI to conduct exchange and monetary management operations in a flexible and stable manner.

2. Why did the Government increase the MSS ceiling steeply and suddenly?

The Government of India today raised the MSS ceiling to Rs 600,000 crore for the financial year 2016-17 from Rs 30,000 crore fixed earlier. The steep raise was expected for the past one or two weeks following the flood of money into bank deposits due to the currency ban on 8 November 2016.

This MSS instrument was used by RBI between 2004 and 2010 to first absorb liquidity of FII (now FPI) inflows into Indian securities and later inject liquidity into the financial system post the global financial crisis (GFC) that started in 2008. After the Lehman Brothers crisis, RBI started unwinding/de-sequestering of the MSS securities and released liquidity into the banking system, without expanding its balance sheet. The MSS outstanding balance has remained zero since 28 July 2010 till yesterday.

3. Will the Government use MSS money absorbed by RBI?

Issue of MSS bills/bonds by RBI leads to accretion of government deposits with the RBI, but they remain sterilised in the sense the government cannot use these MSS funds for its expenditure purposes. Amount raised under MSS will be kept in MSS cash account, which is separate from the normal cash account of the Central Government maintained with the RBI. Basically, RBI impounds these MSS funds.

4. What is the impact of issue of MSS securities on country's fiscal deficit?

The Market Stabilisation Scheme is backed by a corresponding equivalent amount of cash balances with the RBI. Amounts raised from MSS bills/bonds will not enter the Consolidated Fund of the Central Government.

As the funds raised under MSS would remain hoarded by the RBI in its books, there is no impact on the fiscal deficit of the Centre.

After MSS unwinding/de-sequestering, the money will be transferred from MSS cash account to the normal cash account of the Government. With the unwinding of MSS bills/bonds, the government will be able to use the money for its expenditure.

Interest due on MSS securities will be paid by the Central Government--to this extent MSS will impact the fiscal deficit of the government.

5. What type of instruments are issued under MSS?

Under the MSS, RBI issues dated securities and Treasury bills by way of auctions--either multiple price auction or uniform price auction up to a limit mutually agreed upon between the Government and RBI. They are marketable government securities eligible for statutory liquidity ratio (SLR), repo and LAF.

Today, the RBI issued 28-day cash management bills (CMBs) worth Rs 20,000 crore under the MSS, after raising the MSS ceiling for FY 2016-17 to Rs 600,000 crore.

6. What is the difference between LAF and MSS?

The Liquidity Adjustment Facility (LAF) is basically used for day-to-day liquidity management, while the MSS is used for semi-durable and durable mismatches.

The LAF is used for short-term liquidity purposes, whereas the MSS is used for funds of medium or long term nature. For greater transparency and stability in the financial markets, the RBI releases an indicative quarterly schedule for issuance of Treasury bills and dated securities.

7. Who will invest in MSS bills/bonds?

The participants in the auction of MSS bills/bonds are commercial banks, cooperative banks, financial institutions such as insurance companies, primary dealers, etc.

8. What other types of policy tools are used by RBI in its liquidity management?

LAF: The Liquidity Adjustment Facility (LAF) introduced in June 2000 is the primary tool used by the RBI for liquidity absorption (reverse repo) and injection (repo) for day-to-day purposes. It is generally used for temporary purposes, not for liquidity of enduring nature. The LAF enables the RBI to modulate short-term liquidity ensuring overnight call money rates move in the LAF corridor (between repo and reverse repo rates). The LAF repo rate has emerged as the policy signalling rate.

OMO: With open market operations, RBI purchases and sells government securities. It is the main instrument of sterilisation used by the RBI. OMO sales entail the permanent absorption of the liquidity.

Centre's surplus balance with RBI: The Central Government's surplus balance kept with the RBI also work as an instrument of sterilisation. As the RBI Act does not permit RBI to pay interest on such balances, these balances are invested in government securities held with the RBI. 

CRR: Cash reserve ratio (CRR) is considered a blunt instrument for impounding liquidity of the banking system. Currently, CRR is kept at 4%. On 26 November 2016, RBI imposed an incremental CRR of 100% on increase in bank balances between 16 September 2016 and 11 November 2016. This additional CRR is a temporary step to manage excess liquidity arising from currency ban.

MSF: Marginal standing facility was introduced by the RBI in 2011. The MSF is an additional window provided by RBI to banks, so that the latter can borrow overnight funds from the RBI against their excess SLR (statutory liquidity ratio) holdings. MSF scheme is similar to the LAF-Repo scheme. The difference between MSF and LAF-Repo is that under MSF, banks will have to pay higher rate of interest to RBI for their borrowings as compared to LAF-Repo.

In addition to the above (MSS, LAF, OMO, Centre's surplus balance, CRR and MSF), RBI also uses SLR and bank rate as monetary policy tools.

Earlier, RBI used policy tools such as, prescribing deposit and lending rates of commercial banks, selective credit control (SCC) over sensitive commodities and sector-specific standing facilities. But over the years, it had stopped using them.

9. Who will bear these costs of sterilisation?

a) In case of cash reserve ratio (CRR) and incremental CRR, banks bear the costs as RBI doesn't pay any interest on such CRR balances.

b) Government of India bears the cost of interest in the case of MSS.

c) In case of LAF window, RBI bears the costs.

So the costs are shared among all the three players. Of course, the costs borne by RBI will reflect in its balance sheet by way of lower transfer of surplus to the government.

References:

On 02Dec2016 MSS ceiling raised to Rs 600,000 crore for 2016-17

MSS was launched on 23Feb2004

MOU between GOI and RBI for MSS 25Mar2004

Report of the Working Group on Instruments of Sterilisation 02Dec2003

Report of the Internal Group on LAF 13Jan2004

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Additional Information:

What are the indicators of liquidity in the Indian financial system?

a) Outstanding balances under LAF (repo and reverse repo) on a specific date

b) Outstanding balances under MSS on a specific date

c) Central government's surplus with the RBI on a specific date

Related articles:

What is LAF Repo Rate 23Jul2013

Bank Rate and its relevance 23Jul2013

What are cash management bills 15Jun2010

What is Marginal Standing Facility 20Jul2013

Disclosure:  The author has a vested interest in the financial markets.

Disclaimer: The author is a CFA Charterholder (USA) and an investment professional. The views are personal. His views should not be construed as investment advice. Before making any investments, you are advised to consult your registered financial advisor. The author will in no way responsible for the decisions taken by readers.

LAF Repo Rate: The Single Policy Rate-VRK100-23Jul2013

  

Rama Krishna Vadlamudi, HYDERABAD      23 July 2013
www.ramakrishnavadlamudi.blogspot.com

As shown in the above graph, Repo Rate under RBI’s Liquidity Adjustment Facility (LAF) has been declining indicating the gradual easing of monetary policy stance by RBI following the moderation of inflationary pressures.

Before the introduction of revised operating monetary policy in May 2011, Reserve Bank of India (RBI) had been using various monetary instruments to signal the monetary policy stance. Since May 2011, RBI has been using Repo Rate as the single policy rate and all the other policy rates are linked to the Repo Rate. Rates that are linked directly to Repo Rate are: Reverse Repo Rate and Marginal Standing Facility (MSF) Rate. Bank Rate is indirectly linked to Repo Rate. Reverse Repo rate is kept at 100 basis points (or one percentage point) below Repo Rate.

Short-term interest rates represented by call money rates and CBLO rates are supposed to move in a range between the Repo Rate and the Reverse Repo Rate. LAF Corridor is the excess of LAF-Repo Rate over the LAF-Reverse Repo Rate. The objective of RBI is to keep the short term interest rates in the banking system within this LAF corridor.

Timeline for LAF Repo Rate:

The following is a timeline of Liquidity Adjustment Facility (LAF) and Repo Rate:

April 1998	The Narasimham Committee II on Banking Sector Reforms recommended introduction of LAF
5 June 2000	RBI introduced a full-fledged LAF
16 Aug. 2004	One-day fixed rate reverse repo was re-introduced while continuing with the 7-day and 14-day reverse repos and overnight fixed rate repos
29 Oct. 2004	The nomenclature of repo and reverse repo were interchanged as per international usage
1 Nov. 2004	The 7-day fixed rate and 14-day variable reverse repos were phased out and the LAF was operated through overnight fixed rate repo & reverse repo

Salient Features of RBI’s LAF:

Ø  Liquidity Adjustment Facility (LAF) is a facility by which the RBI adjusts the daily liquidity in the domestic markets (India) either by injecting funds or by withdrawing them out

Ø  The LAF enables the RBI to smoothen short-term liquidity under varied financial market conditions, ensuring stable conditions in the overnight (call) money market

Ø Repo denotes injection of liquidity by RBI against collateral of eligible instruments. Repo rate is the rate at which RBI lends overnight funds to banks.

Ø Reverse Repo denotes absorption of liquidity by RBI against collateral of eligible instruments. Under Reverse repo, banks park their surplus overnight funds with the RBI and the RBI pays interest to banks at the Reverse repo rate.

Ø Both the Repo and Reverse Repo operations are conducted at a fixed rate

Ø The Repo rate is fixed by RBI from time to time. At present, Repo rate is 7.25 percent. Reverse Repo rate is pegged at 100 basis points below the Repo rate and as such the current Reverse Repo rate is 6.25 percent.

Ø  All Scheduled Commercial Banks (excluding Regional Rural Banks) and Primary Dealers are permitted to participate in Repo and Reverse Repo auctions

Ø   The minimum bid size will be Rs 5 crore and in multiples of Rs 5 crore thereafter

Ø  The LAF avoids targeting a particular level of overnight money market rate due to external factors impacting short-term liquidity, such as volatile government cash balances and unpredictable foreign exchange flows

Ø Repos and Reverse Repos are undertaken in all SLR-eligible transferable Government of India Dated Securities/Treasury Bills

Ø A margin of five percent is required for the above eligible securities. The amount of securities offered or tendered on acceptance of a bid for Rs.100 will be Rs.105 in terms of face value.

Ø In this direction, the LAF introduced in June 2000 has now emerged as the principal operating instrument of monetary policy

RBI’s Measures to Curb Exchange Rate Volatility:

The measures concerning LAF taken by RBI on 15Jul2013 to rein in rupee volatility are:

ü   The MSF rate has been readjusted to 300 basis points (from the earlier 100 basis points) above the policy Repo rate under the Liquidity Adjustment Facility (LAF). As such, the MSF rate is raised to 10.25 per cent from 8.25 percent with effect from 16Jul2013.

ü   With effect from 17Jul2013, the total amount under RBI’s LAF is restricted to one percent of the net demand and time liabilities (NDTL) of the banking system, reckoned as Rs 75,000 crore (Earlier, there was no such quantitative restriction)

Additional measures concerning LAF taken by RBI on 23Jul2013 to curb rupee volatility are:

ü The overall limit for access to LAF by each individual bank is set at 0.5 per cent of its own NDTL. This measure will come into effect immediately, i.e., from 24 July 2013 and will remain in force until further notice.

ü The earlier instructions issued by RBI on 15Jul2013 regarding cap on overall allocation of funds at Rs 75,000 crore under LAF stand withdrawn

LAF Repo Rate: The Single Policy Rate:

As part of the Deepak Mohanty Committee Report (March 2011) on the operating procedure of the monetary policy, the RBI in its Annual Policy statement 2011-12 made the following important changes with effect from 03 May 2011*:

1  The weighted average overnight call money rate will be the operating target of monetary policy of the RBI

2 There will henceforth be only one independently varying policy rate and that will be the repo rate. The transition to a single independently varying policy rate is expected to more accurately signal the monetary policy stance.

All central banks have a single policy rate for liquidity and monetary management. Now, RBI too is following the international norm of a single policy rate. All the refinance facilities (e.g., export refinance and general refinance) provided by RBI are at the Repo Rate. At present, Repo Rate has emerged as the single policy rate to unambiguously signal the stance of monetary policy to achieve macroeconomic objective of growth with price stability.

(* Before 03May2011, RBI was using both LAF Repo rate and LAF Reverse Repo rate as policy rates to signal monetary policy actions).

To Sum Up:

The RBI has over the years has used a variety of direct and indirect instruments to signal monetary policy actions. Prior to late 1990s, monetary policy was conducted with the help of direct instruments, such as, SLR, CRR, and selective credit control.

In an effort to move away from direct instruments of monetary control to indirect instruments in a market-based economy, a fundamental change in the conduct of monetary policy in India was effected through the introduction of LAF in June 2000. Since then, the LAF scheme has evolved in a series of steps taken by RBI to move towards monetary management based on short-term market interest rates.

With the adoption of Deepak Mohanty Committee recommendations, LAF Repo rate has become the single policy rate and overnight call monetary rate has become the operating target for conducting monetary policy in India. 

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Annexure 1:

Direct instruments of monetary control used by RBI in the past were:

§       Prescribing deposit and lending rates of commercial banks

§       Selective credit control over sensitive commodities

§       Sector-specific standing facilities

§       Statutory liquidity ratio (SLR) & Cash reserve ratio (CRR); and

§       Bank Rate

Indirect monetary policy instruments  are:

§       Open market operations (OMO)

§       Purchase and repurchase of government securities

§       LAF Repo rate and Reverse Repo rate

§       Marginal Standing Facility Rate (MSF)

§       Market Stabilization Scheme or MSS (used for sterilization of large capital flows)

Notes: CBLO-Collateralized Borrowing and Lending Obligation of the Clearing Corporation of India Limited. It is a money market instrument through which CCIL imparts liquidity to market participants.

Reference: Report of the Deepak Mohanty committee, other RBI reports and Paper by Rakesh Mohan on Monetary Policy Transmission,

Disclaimer: The author is an investment analyst and freelance writer. His articles on financial markets and Indian economy can be reached at:

http://ramakrishnavadlamudi.blogspot.in/ and www.scribd.com/vrk100

Update on Marginal Standing Facility-VRK100-20Jul2013

Rama Krishna Vadlamudi, HYDERABAD       20 July 2013
www.ramakrishnavadlamudi.blogspot.com

Indian rupee has been depreciating steeply against the US dollar ever since the US Federal Reserve has hinted at tapering its quantitative easing (QE3) programme. For the first time since its introduction in 2011, the Reserve Bank of India (RBI) has used its marginal standing facility (MSF) to control depreciation of Indian rupee against the US dollar. The measures initiated by RBI on 15 July 2013 to rein in rupee volatility are:

a). The MSF rate has been readjusted to 300 basis points (from the earlier 100 basis points) above the policy Repo rate under the Liquidity Adjustment Facility (LAF). As such, the MSF rate is raised to 10.25 per cent from 8.25 percent with effect from 16Jul2013.

b). Accordingly, Bank Rate has been raised to 10.25 percent with effect from 15Jul2013 (since 13Feb2012, Bank Rate has been made equal to MSF rate)

c). With effect from 17Jul2013, the total amount under RBI’s LAF is restricted to one percent of the net demand and time liabilities (NDTL) of the banking system, reckoned as Rs 75,000 crore

d). RBI would sell government securities to the tune of Rs 12,000 crore on 18Jul2013 as part of its open market operations (OMO)

What is Marginal Standing Facility (MSF)?

The MSF was started by RBI during the Annual Policy statement announced by it on 03 May 2011. The MSF facility was made effective from 09 May 2011.

The marginal standing facility is an additional window provided by RBI to banks, so that the latter can borrow overnight funds from RBI against their excess SLR (statutory liquidity ratio) holdings. MSF scheme is similar to LAF-Repo scheme. The difference between MSF and LAF-Repo is that under MSF, banks will have to pay higher rate of interest to RBI for their borrowings as compared to LAF-Repo.

Banks will look for the MSF window to borrow money from RBI once they exhausted all other avenues (like, call money market, LAF-repo window, Collateralized Borrowing and Lending Obligation or CBLO, market repo, etc.) for overnight money. Under exceptional circumstances, banks will borrow money through MSF window.

What are the Salient Features of MSF?

1. The Objective of MSF:

This facility is expected to contain volatility in the overnight inter-bank money market.

2. Eligibility:

All scheduled commercial banks (SCBs) are eligible to borrow from RBI under MSF.

3. Tenor and Amount:

With effect from 17Apr2012, Banks can borrow overnight funds up to two percent of their NDTL. In general, the borrowing is for one day except on Fridays when the facility will be for three days. Banks can continue to access the MSF even if they have excess SLR holdings. (Prior to 17Apr2012, banks were allowed to borrow funds up to one percent of their NDTL under MSF).

4. Rate of Interest:

With effect from 16Jul2013, banks under MSF have to pay interest at the rate of 300 basis points or three percentage points above the LAF-Repo rate. At present, LAF-Repo rate is 7.25 percent and as such, the MSF rate is 10.25 percent. So, whenever LAF-Repo rate is revised by RBI, the MSF rate will be revised accordingly. Prior to 16Jul2013, MSF rate was linked to 100 basis points above LAF-Repo rate.

5. Minimum Size:

Under MSF scheme, banks will have to make requests for a minimum of Rs one crore and in multiples of Rs one crore thereafter.

6. Eligible Securities:

They are Government of India Dated Securities/Treasury Bills and State Development Loans (SDL).

7. Margin Requirement:

A margin of five percent is required for GOI Dated Securities and Treasury Bills; and for SDLs, it is 10 percent. So, banks will have to offer Rs 105 (face value) worth of GOI Dated Securities and Treasury bills for a request of Rs 100; and Rs 110 (face value) worth of SDLs for a request of Rs 100.

MSF Rates since Beginning:

Graph showing the MSF rates since inception:

Special Repo Window for Mutual Funds:

RBI had on 17Jul2013 provided a special repo window whereby banks can avail funds from RBI to meet the liquidity requirements of mutual funds. Under this special repo window, banks can avail liquidity assistance from MSF up to 0.5 percent of NDTL, which is over and above the two percent (of NDTL) regular MSF window. This additional limit of 0.5 percent of NDTL will be available for a temporary period till further notice.

Off-beat Move by RBI:

By increasing MSF rate to curb rupee volatility, the RBI has acted in an off-beat manner to the surprise of market participants. Though the stated objective of RBI in raising MSF rate is to address exchange rate volatility, the market participants have interpreted the measure as raising short-term interest rates. The bond markets have panicked and bond prices have fallen sharply with bond yields shooting up much to the chagrin of investors. In the equity markets, banking stocks have fallen steeply due to liquidity squeeze and Treasury losses from bond portfolios.  

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Reference: RBI

Disclaimer: The author is an investment analyst and freelance writer. His articles on financial markets and Indian economy can be reached at:

http://ramakrishnavadlamudi.blogspot.in/ or www. scribd.com/vrk100


Note: Please check the comment attached below, made on 05Dec2018 by me, for interest rate on MSF, which is now 25 basis points above the LAF Repo rate.

What is Marginal Standing Facility or MSF-VRK100-05Oct2011

Update on MSF dated 20Jul2013 is available at:

http://ramakrishnavadlamudi.blogspot.in/2013/07/update-on-marginal-standing-facility.html

What is Marginal Standing Facility (MSF)?

The Marginal Standing Facility was started by the Reserve Bank of India during the Annual Policy announced by it on 03 May 2011. Banks can now borrow overnight from the RBI’s MSF window up to one per cent of their respective net demand and time liabilities or NDTL.

This is an additional window and the interest rate is more expensive compared to repo rate under liquidity adjustment facility (LAF). The rate of interest on amounts accessed from this facility will be 100 basis points (or one per cent) above the repo rate. At present, the MSF rate is 9.25 per cent.

Banks will look for the MSF window to borrow money from RBI once they exhausted all other avenues (like, call money market, LAF-repo window, CBLO, market repo, etc.) for overnight money. Under exceptional circumstances, banks will borrow money through MSF window.

RBI Monetary Policy - Mid-Quarter Review of June 2011-VRK100-17062011

RBI Monetary Policy

Mid-Quarter Review of June 2011

Rama Krishna Vadlamudi, HYDERABAD June 17, 2011

As expected, the Reserve Bank of India has raised its benchmark Repo rate (under its Liquidity Adjustment Facility or LAF) by 25 basis points to 7.50 per cent when it announced the mid-quarter monetary policy on June 16, 2011. The new rate is with immediate effect. The Reverse Repo rate under LAF and the interest rate under Marginal Standing Facility are linked to Repo rate. As such, both the Reverse Repo rate and Marginal Standing Facility rate stand increased to 6.50 per cent (one per cent below Repo rate) and 8.50 per cent (one per cent above Repo rate) respectively with immediate effect.

Since the beginning of year 2010, RBI has been increasing the interest rates continuously. The latest Repo rate hike is tenth increase since March 2010 when RBI increased Repo rate from 4.75 per cent to 5.00 per cent – the cumulative increase in Repo rate amounts to 275 basis points (or 2.75 per cent) in the last 15 months.

Rationale

What is the rationale behind RBI’s latest increase in rates?

 Inflation rate of 9.1 per cent (provisional figure) remains at highly uncomfortable levels due mainly to high commodity prices

 Non-food manufactured goods prices have gone up in May 2011 in addition to higher inflation of food articles

 Manufacturers are passing on the increase in wage cost and service cost to consumers as is evident in the inflation indices

 Private consumption is at higher levels even though there is some deceleration in some sectors, like, automobiles

Impact

The present rate hike from RBI is on the expected lines. The stock market as well as the bond market has weakened considerably well before the announcement of the RBI’s rate hike. In its Annual Policy announced on May 3rd this year, RBI raised the Repo rate by 50 basis points in one go. After the Annual Policy announcement, commercial banks were quick to increase their lending rates suggesting strong monetary policy transmission, which indicates the ability of the RBI to pass on its policy initiatives to the broader economy.

On June 16, 2011, the benchmark Sensex closed at 17,986 down 0.81 per cent over the previous day’s close and the Nifty was down at 5,397. The downtrend is likely to continue till the next policy announcement by RBI. One can expect Sensex to drift down another 10 per cent from the current 18,000-level.

The bond market too had been reacting negatively in the last six weeks or so to the expected increase in RBI rate hikes. The benchmark 7.80 per cent 10-year Government of India security maturing in 2021 was showing signs of weakness till the policy announcement yesterday. But, after the rate hike announcement mid-day, the bond prices have gone up and the benchmark paper’s yield declined to 8.30 per cent from 8.38 per cent the previous day (bond prices move in opposite direction to bond yields). The future for Government bond prices looks weak now.

Commercial banks have been enjoying good net interest margins. As such, they may absorb some of the present rate hike themselves while some portion of the burden will be passed on to borrowers. Banks may increase their deposit rates also depending on the credit offtake. Overall, borrowers can expect rate increases in home loans, car loans, coporate loans, etc. This in turn will adversely affect domestic consumption.

Outlook

It is not clear whether the RBI’s actions in the last 15 to 18 months have been able to contain inflationary expectations even as GDP growth rate has moderated to 7.8 per cent in the January-March 2011 quarter from 9.4 per cent in January-March 2010 quarter. There is visible slowdown in manufacturing as indicated in the Industrial Index of Production (IIP). In the month of April 2011, IIP is at a sober level of 6.3 per cent. However, the apprehensions regarding the effectiveness of monetary policy in containing growth-induced inflation remain unanswered at this point of time.

Diesel price may be increased by the Government as the fiscal deficit may go out of control this year due to higher cost of imported crude oil. The subsidy burden of diesel, LPG and kerosene is too heavy for the Government. The liquidity situation seems to be comfortable now. Credit growth is around 21 per cent year-on-year above the RBI’s indicative projection of 19 per cent. The monsoon is most likely to be normal this year providing some hope on the food inflation front.

With stock markets languishing in sideways to downward trend, it remains to be seen whether the Government will be able to go ahead with its disinvestment programme. If it fails to raise additional money through disinvestment, its hold on the fiscal situation will deteriorate leading to higher fiscal deficit. Higher fiscal deficit may translate into higher interest rates in future. If the Government increases diesel prices, it may further accentuate inflationary expectations in the economy.

The financial markets have been expecting another rate hike of a minimum of 50 – 75 basis points before the end of this fiscal year. However, what needs to be emphasized is that RBI will be keenly watching the important data, like, inflation, GDP growth, tax collections, disinvestment of public sector companies, oil prices, global cues, and others, before making further moves on its fight against inflation monster.

In the last 15 months, RBI has been increasing interest rates as per market expectations as inflationary pressures have been building up in the economy. But the same cannot be said for the future RBI’s moves on interest rates. Next time, we need to expect the unexpected from RBI. Even though many experts and analysts have been expecting 50 to 75 basis points increase, we need to keep our fingers crossed and keep a close eye on data.

Repo rate: The overnight rate at which banks borrow money from RBI by pledging Government securities with RBI

Reverse Repo rate: The overnight rate given by RBI to banks when the latter keep their surplus funds with RBI (one per cent below Repo rate)

Marginal Standing Facility (MSF): Banks can borrow overnight from the RBI’s MSF up to one per cent of their respective net demand and time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100 basis points (one per cent) above the repo rate.

LAF – RBI’s Liquidity Adjustment Facility

RBI – Reserve Bank of India,

LPG – Liquefied Petroleum Gas

GDP – Gross Domestic Product or national income

IIP – Index of Industrial Production

Disclaimer: The views of the author are personal.

The author writes copiously on financial markets – equities, bonds, currencies, taxes, Indian economy, etc. You can read these articles on:

www.scribd.com/vrk100

or

www.ramakrishnavadlamudi.blogspot.com





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