For now, the Reserve Bank of India’s (RBI) measures to curb speculation in the foreign exchange market haven’t stopped the slide of the rupee. Not only that, they have disclosed other problems.

File photo of the Reserve Bank of India in Mumbai. AFP

But the local currency resumed its decline after that. On Tuesday, the rupee slid further to close at 52.89 per dollar.

The measures reek of desperation. The consensus is that the rupee will likely be weak for some more months because of the weak economy. Simply put, inflation is high, the current account deficit is widening, foreigners are withdrawing money and other capital inflows are shaky.

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So these steps, at best, may work in the short term. Still, some dealers say that had these not been introduced, the rupee may very well be hovering around 56-58 to the dollar. But problems remain.

Second, banks’ earnings, which have already been under pressure this fiscal due to poor asset quality, rising interest rates and slowing credit growth could get hit further. A fall in volumes will impact banks’ fee income.

For large domestic banks, Citigroup estimates that foreign exchange transactions account for 1.5-4% of total revenue and 6-16% of pre-tax income. Thus, a one-third reduction in volume could lead to a 1.3-3.2% cut in pre-tax income for these banks. The brokerage estimates that the banks that could get hit the most are the country’s three largest private banks—ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd—which might see pre-tax earnings drop 2.2-3.18%.

Graphic by Yogesh Kumar/Mint

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