The Central Bank yesterday compressed the policy rate corridor to 150 basis points (bps) from the current 200 points, by cutting the rate for the lending of overnight funds to the banking system by 50 basis points, claming “volatility in the interbank call money market has reduced substantially.”
Accordingly, the Standing Lending Facility Rate (SLFR) which will replace Reverse Repurchase Rate now stands at 8 percent while Standing Deposit Facility Rate (SDFR) which will replace Repurchase Rate stands unchanged at 6.50 percent.
“It is expected that this compression will facilitate the reduction of the interest spread of banks over time, without affecting the deposit rates offered by banks to their customers,” the Central Bank said.
Open Market Operation (OMO) auctions will continue unchanged, with Repurchase and Reverse Repurchase auctions, depending on liquidity conditions in the domestic money market.
However the Central Bank will not provide collateral to OMO participants under the Standing Deposit Facility (repurchase), given the monetary authority’s zero credit risk in rupee transactions, with effect from February 2014. But all the other OMO transactions will remain collateral based, as at present.
The Central Bank expects the economy to grow at 7.2 percent in 2013 and inflation is projected to remain low at mid single digit levels. The Balance of Payment Surplus for 2013 is estimated at US $ 700 million, though according to Central Bank the figure is likely to reach US $ 1 billion once all figures are finalized.
The monetary authority adjusted key policy rates by cutting 125 basis points within the period from December 2012 to October 2013 to spur economic growth.
With the expected improvement in net foreign assets of the banking sector, continued fiscal consolidation and increased growth of credit to the private sector of around 16 per cent, broad money is projected to expand by about 14 percent in 2014.
Meanwhile public corporations have continued to repay the banking sector for the third consecutive month, resulting in credit to public corporations declining by Rs.18.8 billion in November 2013. Net credit to the Government also declined by Rs.3.5 billion during the month.
Meanwhile the Central Bank also removed the cash margin requirement of 100 percent against Letter of Credit opened with commercial bank for the importation of motor vehicles imposed in August 2013 considering the improvement in the external sector.