MSF to remain the key rate for some time

In fact short-term rates will continue to remain near the MSF rate in the next week or so

The Marginal Standing Facility (MSF) rate will continue to remain the operative one in a situation when all the liquidity tightening measures undertaken by the Reserve Bank of India (RBI) in mid-July have yet to be fully rolled back.

In fact, short-term rates will continue to remain near the MSF rate for at least a week, as Diwali is round the corner and in the festive season, currency in circulation goes up.

The MSF rate is now 8.75 per cent, after the 25 basis points (bps) cut by RBI on Tuesday. It was cut by 25 bps in May but then raised in mid-July to 10.25 per cent from the earlier 8.25 per cent, to arrest volatility in the rupee’s value against the dollar. In the mid-quarter review last month, RBI had cut the rate by 75 bps; then, earlier this month, again by 50 bps.

“The short-term rates will now float between 7.75-8.75 per cent. In the next one week or so, in the festive season when currency in circulation goes up, the system liquidity deficit will be higher, due to which the overnight rates will be closer to the MSF rate. But after that, when liquidity improves, we could see overnight rates shifting downwards near the repo levels,” said Badrish Kulhalli, head of fixed income at HDFC Life.

RBI also raised the liquidity provided through term repos of seven-day and 14-day tenures to 0.5 per cent of banks’ net demand and time liabilities, from 0.25 per cent earlier. Arvind Konar, head of fixed income, Almondz Global Securities, says Rs 19,000 crore worth of borrowing will shift from the MSF to term repos due to this move.  

Meanwhile, in the inter-bank money market, the weighted average call rate was 8.73 per cent on Tuesday, compared with 8.99 per cent on Monday. The weighted average collateralised borrowing and lending obligation was at 8.73 per cent, compared with 8.97 per cent on Monday.