The Reserve Bank of India (RBI) on Tuesday stepped in again to make the rupee recover lost ground in the foreign exchange market,asking banks to park more funds under the cash reserve ratio and limiting their access to overnight borrowings.
The measures build upon the steps the RBI took last week to hike rates on some of the key interest rates.
The current set of measures were also described as interest rate hikes by experts. Saugata Bhattacharya,chief economist,Axis Bank said,This is effectively a rise in cash reserve ratio and the repo rate. The good news is they are targeting the shorter end of the yield curve,unlike the measures last week.
RBI has halved the overall limit for access to Liquidity Adjustment Facility (LAF) by each individual bank to 0.5 per cent of their net demand and time liabilities. Banks use this window to borrow cash from the RBI at 7.25 per cent by offering collateral. Slicing the percentage means they cannot hope to raise more money to average out their requirements.
This measure will come into effect immediately,i.e.,from July 24 and will remain in force until further notice, the Reserve Bank of India statement read.
On July 15,the central bank had announced that the overall allocation of funds under the LAF will be limited to one per cent of the NDTL of the banking system,reckoned as Rs 75,000 crore for this purpose. It has now also steeply raised minimum daily cash reserve balance that banks need to maintain with it to 99 per cent of the requirement.
Till now banks could afford to keep only 70 per cent of the minimum daily required balance with the RBI as a forbearance measure. This facility has been withdrawn.
The RBI statement read that the measures were initiated based on a review of the steps announced on July 15 and an assessment of the liquidity and overall market conditions going forward.
On Monday,the RBI put curbs on gold imports and directed importers to export 20 per cent of gold imported into the country. However,the rupee came under pressure on Tuesday and closed four paise lower at 59.76 against the dollar. It has given up all the gains against the dollar made last week when it improved to 59.3 against the dollar.
Over the last two months,the RBI has undertaken several measures to contain the volatility in the foreign exchange market. These include hikes in the Marginal Standing Facility rate to 10.25 per cent,a rise of 200 basis points from 8.25 per cent and limiting the size of the currency markets.
After the RBI steps,the government securities auction faced several hiccups and the bond market has fallen. The rupee has fallen almost 10 per cent in the last three months. It fell to an all-time low of 61.21 against the dollar on July 8.