Mumbai: A day after the central bank unveiled a raft of measures to infuse liquidity in the financial system and stem the rupee’s decline, the local currency rose against the dollar and the overnight money-market rate fell, reducing the short-term borrowing costs of commercial banks.
But there was no comfort for equity market investors, with the benchmark index of the Bombay Stock Exchange (BSE), the Sensex, losing about 256 points, or 1.9%, to close at 13,262.90, reversing a short-lived morning rally staged in concert with other markets in Asia and the US.
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Swinging Along (Graphic)
The Reserve Bank of India (RBI) had on Tuesday offered banks additional liquidity support and said it would continue to sell dollars through banks to augment supply in the domestic foreign exchange market, or even intervene directly.
The announcement delivered a boost to the rupee, which rose from Tuesday’s low of 46.99 to a dollar to as high as 46.25. The local currency closed at 46.37 a dollar on Wednesday from its Tuesday’s close of 46.93.
“There was huge volatility in the rupee market today after the RBI measures, and I see rupee going back to the 46 level soon, may be within one, or two days,” said Sanjeev Patra, senior currency dealer at Bank of Nova Scotia.
RBI’s measures to ease liquidity also cooled the interbank call money rate, which had zoomed to 16% on Tuesday. The call money rate closed at 10.15% on Wednesday. Banks borrow from the market to meet temporary asset-liability mismatches.
According to foreign exchange dealers, RBI had to step into the market briefly when the rupee hit 46.70 a dollar in the morning because of “huge dollar demand” from companies and importers.
Economists expect further steps from the central bank to shore up market confidence. “We could see the Reserve Bank of India becoming more active in the coming months,” said Rohini Malkani, economist at the Indian unit of Citigroup Inc.
Rate hike concerns ease
According to economists at large local and foreign banks and brokerages, possible central bank measures include a cut in the statutory liquidity ratio (SLR), the proportion of deposits that banks are required to invest in government bonds. SLR is currently at 25%.
The central bank could take steps to attract external capital by easing norms relating to inflows of funds from non-resident Indians and external commercial borrowings.
It could also keep on hold further increases in interest rates, given the slump in global commodity prices, which is expected to ease inflationary pressures.
RBI has increased the cash reserve ratio, or the proportion of deposits that banks are required to keep with it, by 150 basis points and the policy rate by 125 basis points in this fiscal year. One basis point is one-hundredth of a percentage point.