Latest RBI move is to cut govt borrowing cost, not easing: DBS

Comments 0
Measures, which include capping overnight borrowing of banks, had led to a spike in the rates. (AP) Measures, which include capping overnight borrowing of banks, had led to a spike in the rates. (AP)
SummaryMeasures, which include capping overnight borrowing of banks, had led to a spike in the rates.

Singaporean bank DBS on Wednesday said the latest RBI move to ease liquidity should not be construed as a drawback of its tightening stance, but as a measure to keep the government's borrowing cost under check and give succour to banks.

"Yesterday's RBI steps might be interpreted as a reversal in the policy stance, but we disagree. These measures in fact suggest that the liquidity tightening steps will remain in place for a longer period and short-term rates have been provided a floor," DBS said in a note.

The liquidity tightening measures, introduced through two sets of moves in July to arrest the fall of rupee, will be in place till September, it added.

The measures, which include capping overnight borrowing of banks, had led to a spike in the rates in the money markets, especially at the short end.

The Reserve Bank on Tuesday said it would pump in Rs 8,000 crore into the system through a buyback of government bonds every Friday and a deferment of the need to bring down the held-to-maturity (HTM) bond holdings for banks by allowing them to hold it at 24.5 per cent.

"These efforts are being channelised to arrest the unintended rise in government borrowing costs, while shielding banks from the significant mark-to-market losses from their bond holdings," it said.

DBS said even though the markets reacted positively to the development, "there is little by way of other domestic catalysts to effectively turn the mood."

The only thing to look out for is the direction of the US Fed's tapering of the quantitative easing exercise, which, it said will not happen by September, and hence give some optimism for India.

"A delay in the withdrawal of asset purchases by the US Fed could provide a short term breather for the rupee and financial markets," it said, adding RBI moves will last at least till September-end as it does not expect the Fed to start the tapering before that.

Ads by Google

More from Economy

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...