Liquidity squeeze for volatile rupee

The currency was also boosted by the government’s clarification that it was not ruling out a sovereign bond sale to offshore investors

Written by Anil Sasi | Published: July 24, 2013 1:42:26 am

On Tuesday morning, the rupee and bonds opened stronger after the RBI had announced a further tightening of gold import rules the previous evening. The currency was also boosted by the government’s clarification that it was not ruling out a sovereign bond sale to offshore investors.

Later,during the day,the central bank stepped in with more measures to bolster the currency,asking banks to park more funds under the cash reserve ratio and limiting their access to overnight borrowings.

While the fundamentals of the Indian economy certainly do have a bearing on the beating that the rupee has been taking in the currency markets,the current downward drift appears driven more by market expectations,something that the central bank has tried to address by aggressive interventions over the last month — tightening money available (by capping  its window for banks’ overnight borrowings at 1 per cent of total deposit base of all banks,or Rs 75,000 crore),selling bonds worth Rs 12,000 crore in the secondary market to suck out liquidity and raising the Marginal Standing Facility rate for emergency borrowings by banks from 8.25 per cent to 10.25 per cent.

All of this is aimed at squeezing liquidity and making it prohibitive for banks to carry out rupee-dollar carry trade. The measures by the central bank follow steps taken earlier by both the RBI and the Sebi to cut the liquidity available for currency speculation.

The question,though,is whether enough has been done to stem the bleed? No easy answers to that. The central bank,it seems,can only wait and see how things pan out in the build up to its credit policy review meeting later this month.

Also,if other emerging economies decide to follow Brazil and Indonesia and raise rates,the pressure on RBI to follow reverse its monetary policy stance will rise.

Anil is a senior editor based in New Delhi.

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