The Reserve Bank of India (RBI) is likely to hike the repo rate by 25 basis points to 7.75 per cent and reduce the Marginal Standing Facility (MSF) rate by 25 basis points to 8.75 per cent in the forthcoming monetary policy on Tuesday, according to bankers and analysts.

Repo rate is the rate at which banks borrow funds from the central bank whereas MSF is another short-term borrowing facility provided for banks over and above their entitlement under the Liquidity Adjustment Facility (LAF). “The MSF rate will be reduced by 25 basis points since the rupee has regained stability. Repo rate will be increased by 25 basis points to anchor inflationary expectations. At this measure the corridor between repo rate and MSF rate will be brought to 100 basis points differential,” said N. S. Venkatesh, Chief General Manager, Treasury, IDBI Bank.

Short-term liquidity

“When MSF [rate] is reduced, the cost of short term liquidity for the banking system comes down,” said Mr. Venkatesh.

Despite the weak growth backdrop, “we expect that the RBI will further raise the policy rate by 25 basis points on Tuesday to deliver on its hawkish promises and, through this, help anchor inflation expectations,” said HSBC’s Chief Economist for India & ASEAN, Leif Eskesen in a recent report.

Ratings agency ICRA expects a repo rate hike of 25 basis points. “We expect the RBI to reduce the MSF rate by 25 basis points to further unwind the exceptional measures introduced since July 2013,” said Naresh Takkar, MD & CEO, ICRA.

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