The rupee, which pulled back from below 64 levels on Tuesday, can expect relative calm with the Reserve Bank of India (RBI) announcing a softening of its hawkish policy and both Moodys and Standard and Poors affirming their outlook on India, dispelling fears the collapse in the currency would affect growth.
Also, foreign institutional investors (FIIs) bought limits for $10-billion worth of bonds on Tuesday, and although its not certain they will buy the bonds, the attorney generals opinion on the sale of the residual stakes in Balco and Hindustan Zinc paves the way for the government to mop up $3 billion.
The RBIs press release on Tuesday no longer talks of the need to restore stability to the foreign exchange market as the one on July 15 did. Indeed, it speaks of having achieved the immediate objective of raising short-term interest rates, as evidenced by the money market rates anchoring to the marginal standing facility (MSF) rate of 10.25% and adds that it is important to ensure that liquidity tightening does not harden longer-term yields sharply and adversely impact the flow of credit to productive sectors. To infuse liquidity, the RBI announced open market purchase operations of long-dated gilts for R8,000 crore on Friday, saying more purchases of bonds would be calibrated, both in quantum and frequency, with the markets needs.
The central bank also chose to give banks a reprieve on the Rs 50,000 crore of estimated mark-to-market losses that they would have had to take on their investment portfolios allowing them to retain their SLR holdings in the hold-to-maturity (HTM) category at 24.5% for the time being they had earlier been asked to bring these down to 23% of their net demand and time liabilities. The RBI also allowed banks to shift gilts from the AFS (available for sale) and HFT (held for trading) categories to the HTM category up to 24.5%, as a one-time measure.
Meanwhile, although both the bond and currency markets got off to rough starts on Tuesday the currency fell through the 64 mark, hitting a historic low of 64.13 while the benchmark yield surged to Lehman levels of 9.48% there was less panic by evening with the rupee back at 63.25 and the yield closing below 9% at 8.92. The RBI is understood to have intervened in the market to the extent of $250-300 million. The loss in the equities too, which