Mumbai: The Indian rupee rose and cash rates eased on Monday after a hefty cut by the central bank at the weekend in the amount of funds banks have to keep with it on deposit, which released about $12 billion into the banking system.
The rupee and interbank interest rates had come under intense pressure on Friday due to a severe squeeze in the money markets, which sent cash rates up to a 19-month high of 23% and the rupee to record low of Rs49.30 per dollar.
By overnight cash rates were quoting at about 9.50/10.00% compared with 15.50/16.50% at the close on Friday, just above the central bank’s main lending rate of 9%.
“The CRR cut is slightly positive for the rupee and the stock market is also expected to pick up today,” said V. Kumar, chief dealer at State Bank of Travancore.
The partially convertible rupee strengthened to Rs48.1150/1300 per dollar from Friday’s close of Rs48.38/43, with dealers saying improving liquidity conditions would allow the central bank to intervene by buying rupees to prop it up.
At its record low, the rupee had fallen 20% so far this year, compared with a gain of more than 12% in 2007.
The stock market, which fell 7.1% on Friday, was expected to open higher on Monday, lifted by gains elsewhere in Asia after regulators around the world took a slew of measures to shore up the ailing financial system.
“There may be some short covering today after the sharp sell-off in the last few sessions, but nothing has changed in terms of sentiment and investors are still very nervous,” said independent consultant SP Tulsian.
Shares in ICICI Bank will be watched after its chief executive said on Monday the No. 2 lender had enough cushion to absorb domestic and overseas shocks and that deposits with the bank were safe.
ICICI shares plunged as much as 28% on Friday before ending down 19.7%.
As a measure to ease tight liquidity, the central bank said on Friday it would make a deeper than planned cut in its cash reserve ratio (CRR) on Saturday, to release Rs600 billion into the system.
Bond yields crept lower after the cash reserve cut kicked in with the 10-year bond yield at 7.755, compared with 7.79% at Friday’s close.