The RBI has come in aggressively to protect the INR; through effective Quantitative/Rate measures.
1. Hike in marginal standing facility (MSF) rate of 200bps
2. Ceiling on repo borrowing at Rs750 bn
3. Open Market sale of dated securities
These measures – raising rates 300bps on RBI funding above a certain level (Rs750b Repo, gets triggered currently) are a little unexpected. These may/may not protect the INR – but could hurt banks in real terms, and in their medium-term rate / growth trajectory.
Specifically: a) short-term / wholesale funding rates rising by 50-100bps - negative for wholesale borrowers; b) bond yields rising by 20-50bps: MTM erosion for bond portfolios – relatively aggressive positioning across the system. This could cause absolute pain; contrasting with gains in the currently-reporting quarter. Following these moves, the tight rupee liquidity vis-a-vis US dollar is likely to make it expensive to short Indian rupee against the US dollar.
And the Aftermath of the RBI Move
This step by the RBI should help stabilise the currency at least in the near-term. But like any medicine administered at a time of crisis, this
is likely to have side-effects that the doctor is fully aware of, and some that she is not. So the end of the era of easy liquidity means that the asset quality issues of Banks get surfaced much earlier. This will also affect Indian economic growth and hurt local demand, this should bring down the CAD too. These may be intended too.
