India's Bipolar Monetary Policy Continues: RBI Cuts Marginal Facility Rate Another 50bps To Boost Liquidity

It was less than four weeks ago that the Reserve Bank of India, under new head Raghuram Rajan, stunned the world on September 20 when it announced that it would both hike its repo and cash reserve rates in an inflation fighting step, while lowering its marginal standing facility rate by 75 bps to 9.5% in order to boost banking sector liquidity, hence "bipolar policy" of the kind most recently seen in Europe. Moments ago, the RBI once again showed that when faced with the option of consumer pain, i.e. runaway inflation, and preserving a banking status quo, i.e. liquidity, the central bank will always choose the latter, when in a surprising move the RBI cut its Marginal Standing Facility rate by further 50 basis points, from 9.5% to 9.0%.

From the RBI:

Starting with the Mid-Quarter Review of September 2013, the Reserve Bank of India (RBI) began a calibrated withdrawal of exceptional measures undertaken since July 2013. This was done with a view to normalising liquidity conditions. Accordingly, the marginal standing facility (MSF) rate was reduced by 75 basis points from 10.25 per cent to 9.5 per cent. Furthermore, open market purchase operations of Rs. 9,974 crore were conducted today to inject liquidity into the system. On a review of evolving liquidity conditions and in continuation of this calibrated unwinding, it has been decided to:

  • Reduce the marginal standing facility (MSF) rate by a further 50 basis points from 9.5 per cent to 9.0 per cent with immediate effect.
  • Provide additional liquidity through term repos of 7-day and 14-day tenor for a notified amount equivalent to 0.25 per cent of net demand and time liabilities (NDTL) of the banking system through variable rate auctions on every Friday beginning October 11, 2013. The notified amount and tenor of the term repo auctions will be announced prior to the dates of the auctions.

It seems the liquidity crunch in India is worse than expected. As to whether this incremental boost of liquidity, now amounting to 125 bps in four weeks, will "spur" much needed deflation, or whether purchases of gold will once again be blamed for everything that's wrong under the Indian sun, that is a rhetorical question we are confident we don't have to answer.

Finally, putting the RBI's schizophrenic policy in perspective, watch the ongoing divergence between core cash/repo rates and the marginal standing facility, which continue their convergence path.