RBI takes further measures to support rupee

Chaos continues to build in India’s policies. After taking measures last week to restore value of rupee, RBI takes additional measures

Some measures have been unwound and some new measures have been taken. 

Over the last two months, the Reserve Bank of India (RBI) has undertaken several measures to contain the volatility in the foreign exchange market. Among them, some measures intended to check excessive speculation adding to undue volatility in market conditions were instituted vide the RBI’s Press Release No.2013-2014/100 dated July 15, 2013. These measures have had a restraining effect on volatility with a concomitant stabilising effect on the exchange rate. Based on a review of the measures, and an assessment of the liquidity and overall market conditions going forward, it has been decided to modify the liquidity tightening measures as follows:

  • The overall limit for access to LAF by each individual bank is set at 0.5 per cent of its own NDTL outstanding as on the last Friday of the second preceding fortnight. This measure will come into effect immediately, i.e., from July 24, 2013 and will remain in force until further notice.

  • Currently, banks are allowed to maintain their Cash Reserve Ratio (CRR) prescribed by the RBI on an average daily basis during a reporting fortnight, with a minimum of 70 per cent of the required CRR on a daily basis. Effective from the first day of the next reporting fortnight i.e., from July 27, 2013, banks will be required to maintain a minimum daily CRR balance of 99 per cent of the requirement.

The earlier cap over LAF of Rs 75,000 Cr has been removed. Instead we have a new caps on  banks on LAF borrowing. They can now borrow 0.5% of NDTL in LAF Repo. This means Banks will just get  Rs 37,500 Cr (0.5% of Rs 75 lakh cr, the current NDTL) from the LAF window. 

A daily requirement of 99% of CRR will lead banks to manage CRR books more actively. At 70%, they overborrow in first week and underborrow in second week thus balancing the overall requirement. With 99% requirement, the demand for rupee will be tighter in all days. This will   lead to higher demand for rupee liquidity. With cap on their LAF borrowing, this should lead to higher interest rates. Atleast that is what the transmission idea is..

Interestingly, in backdrop of these rupee liquidity tightening measures, the government has decided to issue Cash Management Bills. After not taking WMA last year, it has borrowed from RBI in quite a few weeks recently. Now, there is announcement of Cash Management Bills – 28 days for 3000 Cr and 56 days for 3000 Cr. This will further drain liquidity from the system (albeit temporarily) as money goes from the system to Government.  Not sure, whether this is a response to address government cash balances or liquidity as RBI’s OMO sales failed to absorb liquidity last week.

 Yields expected to rise further as experts opine. 10 year has already touched 8.17% levels based on previous measures. Though short term rates have bounced back to low levels. Rupee ofcourse remains around 59.70 levels. Let’s see what happens tomorrow. The government and RBI continue to penalise the bond markets and favoring the FIIs. This is getting just ridiculous.  

One can only agree to the latest Bare Talk Column by V. Anantha Nageswaran – Spare a thought for the RBI governor. He has governed during one of the most incompetent government India has ever had. He also shows how RBI took similar measures in 1997 in backdrop of SEAsian crisis. Rupee recovered much quickly then as so called fundamentals were much stronger. It is an irony how India”s fundas have weakened much since 1997 (not even bringing 1991 here) despite going through the wonder 2003-08 years. Such has been the ruin..

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