Rupee’s fall to a fresh all-time low of 61.81/$ on Tuesday has sparked fears that the Reserve Bank of India (RBI) may resort to more liquidity tightening measures.
Even as such fears rose, RBI is said to have sold dollars in the last hour of trade that led to a reversal in fortunes for the rupee, which closed at 60.77/$ compared with Monday’s close of 60.88/$. Market participants estimate the central bank may have sold at least $300-400 million to prop up the rupee.
Sentiment was also boosted on news that the current chief economic advisor, Raghuram Rajan, will succeed D Subbarao as RBI governor. As chief economic advisor, Rajan had proposed a series of measures to curb the rupee’s fall of which a possible sovereign bond issue was one.
With the currency hitting fresh record lows, market participants fear that the RBI may have to resort to a hike in the cash reserve ratio (CRR). The CRR is currently at 4%. ?It is certainly a possibility if they want to continue on this parth of liquidity tightening,? said Abheek Barua, chief economist, HDFC Bank.
The possibility of fresh measures being announced after market close also led to some squaring of positions in the final hour of trade.
?One positive of the monetary measure is that it reinforces the seriousness of the RBI. So, in terms of change in sentiment and showing a definite signal, it is powerful,? said Ananth Narayan G, head of global markets and co-head wholesale banking at Standard Chartered Bank.
The currency has weakened 3% since July 15, despite the RBI decision to cap banks’ borrowings from the repo tender and hike the marginal standing facility (MSF) rate to 10.25% to squeeze liquidity.
Market participants said government spending since then has kept liquidity comfortable in the banking system. Data from the RBI show that the government has drawn down on its cash balances and is borrowing from the central bank under the ways and means advances scheme.
The weighted average call money rate, which the RBI closely tracks, has also fallen to 8.57% on Tuesday from 10% a fortnight ago, reflecting comfortable liquidity. At the same time, banks’ borrowings from the MSF at 10.25% have been intermittent and only about Rs 2,000 crore on an average. With liquidity remaining comfortable, the RBI may be in a position to hike the CRR, say traders.
Meanwhile, despite the marginal rise in yields in the government securities market, FIIs have continued being net sellers of Indian debt so far. FIIs have pulled out $7.5 billion since June.
Earlier this month, governor D Subbarao had said that the RBI has enough arsenal to use in case the volatility in the currency does not subside. RBI deputy governor HR Khan went further and said that more measures to curb the futures market could be considered.
The volume in the futures market has dropped, albeit slightly, after the RBI’s clampdown on speculative trading. In July, the central bank had barred banks from taking proprietory positions on futures. Currency futures on the NSE clocked a turnover of Rs 7,500 crore from around Rs 10,000 crore a week ago.
