RBI may keep rates high unless Fed delays tapering: BoA-ML

RBI hiked the MSF rate by 300 basis points on July 15 in its battle to support the rupee

The Reserve Bank is likely to retain the marginal standing facility (MSF) at the elevated 10.25% in its mid-quarter policy due on September 20 unless the US Federal Reserve defers its plan to withdraw its easy money policy, according to a report.

"We expect the RBI to persist with July tightening of hiking the MSF rate by 300 basis points till mid-December unless Fed chairman Ben Bernanke defers his tapering plans at his September 18 speech," Bank of America Merrill Lynch said in a report.

To save the battered rupee, RBI hiked the MSF rate by 300 basis to 10.25% on July 15 in its battle to support the rupee, which has lost nearly a fifth of its value since the beginning of this fiscal.

The move, which came after rupee fell to Rs 61.21 for the first time against the dollar on July 8, was aimed at keeping liquidity condition tight to curb speculative trading by hiking short-term rates.

The BofA-ML report said the RBI may keep MSF rates higher in this policy as it would come to know about the quantum of FCNR deposits banks are mobilising through its FCNR-B deposit-cum-swap facility scheme only on November 30.

The newly appointed RBI Governor Raghuram Rajan on September 4 had announced a new window for swapping funds from NRIs mobilised through foreign currency non-resident banks (FCNR) deposits.

"After all the RBI will not have clarity on how much FCNR-B deposits banks are mobilizing with the freshly minted 3.5% concessional swap facility till November 30," the report said.

It further said path to the rupee stability would lie through recouping forex reserves rather than hiking rates. The central bank in July net sold $5.9 billion worth of dollars in July, according to the RBI data.

In June, RBI sold $2.252 billion while in May it sold $107 million. "Given that we estimate that it sold another $2.5 billion spot in August, the RBI would not be able to add more than $5 billion in FY14 to forex reserves even if the FCNR-B deposit-cum-swap facility scheme nets $10 billion, the report said.