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RBI seen juggling market funding policies

The Reserve Bank of India is expected to juggle its various funding mechanisms, balancing pressure from banks for more refinance with its objective of cutting assured funding, in Thursday's monetary and credit policy statement.

Traders said the net effect of the RBI's measures may be to only marginally alter overall liquidity.

The central bank refinance limits against concessional export finance, which were halved last July to help defend the rupee, are expected to be reinstated to appease bankers.

But the RBI may axe refinance amounts for primary dealers in government securities and scrap the refinance banks get against deposit holdings to limit the amount of funds accessible at fixed rates and encourage a move to market-related funding rates.

"Refinance of assured amounts and at assured rates spoils the monetary transmission mechanism because it deters the central bank from determining the amount of monetisation," said M R Madhavan, head of research at Bank of America.

Another factor weighing on the decision, analysts said, is the rupee -- which hit a record low of 47.10 per dollar on Tuesday, under pressure from a tumbling stock market. It has since stabilised and on Tuesday afternoon was quoted at 46.84/85.

"The RBI may not want to increase liquidity when the markets have already got plenty of it, especially with the rupee under pressure," said Aashish Pitale, head of research at JP Morgan.

Debt analysts said market speculation estimated the possible net increase in refinance limits at just Rs 50-60 billion, effectively a one percentage point cut in the cash reserve ratio, currently at 8 per cent.

RBI giveth and taketh

Debt market traders expect a reduction of around one-third in the funding limits of approximately Rs 60 billion that the RBI set for primary dealers last financial year. Those limits are based on the dealers' performance and their net worth.

However, primary dealers may gain access to variable rate funds through special repos, similar to the liquidity adjustment facility which replaced part of the fixed rate refinance for banks last year.

The central bank borrows or lends daily through repos under LAF, with the rates and amounts determined by auctions.

The success of the LAF has sparked speculation the RBI will also end the banks' collateralized lending facility against deposits, available at the bank rate, currently at 7 per cent.

If the CLF is withdrawn and primary dealers' limits are reduced, it will translate into a reduction of assured funding from the central bank of about Rs 32 billion.

That could be offset by the anticipated restoration of export credit refinance limits at 8 per cent.

The need to support exports, which have shown signs of flagging after a robust 20 per cent growth in April-February, may leave the RBI with little choice -- especially given the global slowdown the potential impact of oil prices on the import bill.

Exporters have been asking that the cost of their rupee loans, currently priced at a minimum of 10 per cent, be lowered, a demand supported by Commerce Minister Murasoli Maran.

Bankers, whose average cost of funds is higher than that, have been asking that they be compensated for the subsidy.

Export finance limits for banks currently range from Rs 150 billion to Rs 180 billion. Restoring full limits could mean an extra Rs 75 billion to Rs 90 billion to a system already flush with funds.

Some analysts however feel the RBI may advance the base year used for calculation export credit refinance limits so that the available refinance is lower.

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