The Reserve Bank of India on Monday cut a key overnight interest rate, further dialling back an emergency measure it had imposed in mid-July in order to defend the embattled rupee that had tightened market liquidity and pushed up borrowing costs.
The move to cut the marginal standing facility (MSF) rate by 50 basis points to 9.0 per cent was the latest by new Reserve Bank of India (RBI) Governor Raghuram Rajan to return monetary policy settings towards normal after a harrowing run for the rupee that saw it drop as much as 20 per cent on the year as of late August.
"I think RBI is getting more confident about the stability of the rupee and that is the reason they cut the MSF rate now," said Manish Wadhawan, head of trading at HSBC in Mumbai.
"This will lead to a rally in the short-term rates and I expect the G-sec (government securities) curve to steepen and the inversion will correct," he said, adding that he expects the RBI to cut the MSF by a further 50 bps at its October policy review.
After hitting an all-time low of 68.85 to the dollar on August 28, the rupee has strengthened 11.4 per cent and closed on Monday at 61.79 per dollar.
The RBI jacked-up the MSF rate by 200 bps in mid-July, the most dramatic move in a package of measures to defend the currency, which had made the MSF India's de facto policy rate.
Rajan, a high-profile former chief economist at the International Monetary Fund, took office on September 4.
In his first monetary policy review last month, he cut the MSF rate by 75 bps even as he unexpectedly raised the policy repo rate by 25 bps to 7.50 per cent and said he wanted the repo rate to regain its role as the policy rate.
Normally, the MSF rate is 100 bps higher than the repo rate. Monday's move narrows the gap to 150 bps.