RBI steps pull back rupee

MUMBAI, JULY 24: The Reserve Bank of India RBI measures cooled down the volatility in the interbank foreign exchange forex market with...

MUMBAI, JULY 24: The Reserve Bank of India RBI measures cooled down the volatility in the interbank foreign exchange forex market with the rupee recovering to close at a comfortable level of 44.74/75 today, showing an impressive recovery of 28 paise from the previous close of 45.02/03.

The rupee opened sharply higher at 44.70/75 as banks offloaded their over-bought positions following the RBI measures to tighten the liquidity and stabilise the rupee. The Indian unit ruled in a narrow range after bouncing back from Friday8217;s lower level, despite heavy month-end corporate dollar demand, dealers said. The rupee moved in a narrow range of 44.7150-75 during the day. The currency finally closed at Rs. 44.74/75, netting a gain of 28 paise from the previous day8217;s close of 45.02.03

The Indian unit came under tremendous pressure last week after witnessing a continuous fall following huge outflows by foreign institutional investors FIIs coupled with domestic corporate dollar demand. The rupee had dipped to an all-time low of 45.07/08 on Friday, before closing at a record low of 45.02/03, losing 33 paise of its value from the previous week8217;s close of 44.67/70.

Sensing the crisis in the financial markets, the RBI hiked the bank rate by one percentage point to eight per cent and CRR by half-a- percentage point taking away liquidity to the extent of Rs 3,800 crore from the banking system.

Rupee fall may continue: The rupee may continue to fall below the 45 mark to the dollar despite the measures taken by the Reserve Bank of India to check the slide, ICICI Securities I-Sec has said.

quot;The current slide is believed to have been on importers and foreign institutional investors8217; FIIs demand, and this will continue despite monetary measures,quot; I-Sec said in its latest debt market report.

RBI raised bank rate by one per cent to eight per cent, cash reserve ratio CRR by 0.5 per cent to 8.5 per cent in two stages and reduced the refinance limit by 50 per cent on July 21 in a bid to check the rupee from falling further.

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In January and August 1998, there was inter-bank speculations on the exchange rate and after RBI raised bank rate and CRR, the rupee appreciated, I-Sec said. But the declining trend in currency continued after the monetary measures were removed as rupee has a natural tendency to shed its value keeping parity with interest rate, inflation rate and other things, it added.

quot;However, in the current instance, the impact on currency may not be so stark,quot; the report said. The RBI measures, I-sec said, are estimated to result in outflows of about Rs 9,000 crore 8212; Rs 3,800 crore due to CRR hike and another Rs 5,000 crore due to reduction in refinance availability to banks.

I-Sec cautioned that if the rupee again slides to 45 a dollar in a month or two, RBI may take further measures. It report said interest rates on government papers are expected to come under pressure due to the recent steps taken by RBI.

quot;The pressure on yields interest rates of government papers would continue as 60 per cent of centre8217;s borrowing remains to be completed,quot; I-Sec said.

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The government so far mopped up around Rs 44,000 crore of the targetted Rs 1,17,000 crore for 2000-01. In any case, the market sentiment would be dampened on the expectation of possible RBI moves, I-Sec said. This is more imminent specially when there was a strong industrial performance and higher trade both export and import reflecting higher credit demand this year.