To boost liquidity, RBI cuts MSF rate by 50 bps--Business Line 08.10.2013
MUMBAI, OCT 7:
In yet another move to ease liquidity for banks, the Reserve Bank of India on Monday eased interest rate on borrowings under the marginal standing facility (MSF) by 50 basis points (bps) to 9 per cent.
The MSF is an emergency window that banks borrow from when faced with a funds crunch. Mohan Shenoi, President – Group Treasury, Kotak Mahindra Bank, said, “This will reduce the cost of borrowings for banks by 0.5 per cent. Hence, the cost of wholesale deposits may move down by about 25 bps. However, banks will wait till the monetary policy on October 29 to cut retail deposit rates.”
The RBI cut the MSF rate by 75 bps to 9.5 per cent from 10.25 per cent in September as part of its liquidity easing measures.
Earlier in July, the RBI raised the MSF rate by 200 bps to 10.25 per cent to stabilise the volatile rupee. Effectively, this saw the cost of borrowing under this window go up 300 bps over than the repo rate.
The MSF facility was introduced in 2011 by the RBI to contain volatility in the inter-bank overnight market. The interest rate was fixed at 100 bps above the repo rate, which is the rate at which banks borrow from the RBI for the short term against the collateral of government securities.
The RBI on Monday also conducted open market operations (OMOs) to the tune of Rs 9,974 crore to inject liquidity into the system. OMO is the buying and selling of government securities by the RBI to expand or contract the amount of money in the banking system.
TERM REPOS
In addition, on a review of evolving liquidity conditions and in continuation of this calibrated unwinding, the RBI decided to “provide additional liquidity through term repos of 7- and 14-day tenors 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.
Detailed guidelines with regard to term repos are being issued separately, it added.
Fifth of India’s forex reserves at risk if US does not up debt ceiling
- LOKESHWARRI S. K.
- BL RESEARCH BUREAU

India held $59.1 b of US treasury securities as of July 2013
October 7, 2013:
One-fifth of India’s foreign exchange reserves are at risk if the US is unable to raise the debt ceiling and actually defaults on its debt obligations.
According to US Treasury, at the end of July 2013, India held $59.1 billion of US treasury securities. This accounts for 21 per cent of India’s foreign exchange reserves of $276 billion.
The debt ceiling is the total amount of money the US government is authorised to borrow to meet its various legal obligations, including interest payment on the national debt. Many countries, including India, have lent money to the US Government by investing in US Treasury securities.
Holding $1.27 trillion of US treasury securities, China is the largest lender to the US. Among other emerging markets, Brazil with $256 billion, and Taiwan with $178 billion, are others with high exposure.
THE FALLOUT
The wealth of all US government security holders will shrink if the US fails to raise debt ceiling, resulting in a default of the interest or even the principal on these obligations. The ramifications for global financial markets are enormous.
In May 2011, when the world faced a similar situation, the US Treasury had issued a warning saying, “If Congress fails to increase the debt limit, it would cause investors here and around the world to doubt, for the first time, whether the US will meet its commitments. That would precipitate a self-inflicted financial crisis potentially more severe than the one from which we are now recovering.”
This year, too, the US Treasury has been issuing dire warnings that “Failure to raise the debt ceiling has the potential to be catastrophic with credit market freezing, dollar plummeting and US interest rates skyrocketing with the negative spillovers reverberating around the world.”
Indranil Sengupta, in a Bank of America Merrill Lynch report, writes that if the US finally defaults, it would lead to a Lehman-type global collapse that will likely slash about 80 basis points from India’s GDP forecast for 2013-14.
CONGRESS MAY MOVE IN
Most economists, however, believe that US Congress will not let the situation get out of hand.
Indranil Pan, Chief Economist, Kotak Mahindra Bank, says, “Since the dollar is the reserve currency of the world, it is unlikely that this issue will be allowed to escalate. Even if the US Senate fails to raise the ceiling, the President can exercise his veto power to do so.”
ADVANCED/EMERGING
According to the IMF, as of end June 2013, a third of the global foreign exchange reserves were held in dollar-denominated assets (including bank notes, bank deposits and government securities). These assets have grown 41 per cent from the first quarter of 2009 and currently stand at $3.7 trillion.
Advanced economies appear more vulnerable as their dollar denominated holding, as a proportion of total foreign exchange reserves, stands at 56 per cent. This is double the exposure of emerging economies.
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