RBI opens new attack to clamp rupee free fall
In a major attack to clamp the further decline in the Indian rupee against the US dollar, the Reserve Bank of India (RBI) on Monday late evening issued a series of liquidity measures. Bonds yields are now expected to go up while a dearer rupee is likely to create a squeeze in funds availability. Consequently, the demand for rupee will rise.
"The market perception of a likely tapering of US quantitative easing has triggered outflows of portfolio investment, particularly from the debt segment. Consequently, the rupee has depreciated markedly in the last six weeks. Countries with large current account deficits, such as India, have been particularly affected despite their relatively promising economic fundamentals," RBI said in release underscoring the need for immediate measures to restore stability to the foreign exchange market.
The Indian rupee hit record low at 61.21 against the greenback on July 8 this year. Since last two month, it has lost more than 15 percent due to erosion of overseas investment in India.
Measure One:
The central bank restricted banks' borrowing through liquidity adjustment facility (or a window to borrow funds from RBI called LAF) to the tune of 1 percent of total deposits or Rs 75,000 crore. It will be effective from July 17 when onwards, banks have to look for other options to meet their overnight fund requirements if the level reach the stipulated mark.
LAF is the combination of two auction routes: repo and reverse repo. While banks borrow from repo currently at 7.25 percent, they park their excess liquidity via reverse repo rate at 6.25 percent.
Measure Two:
Accordingly, RBI raised the interest rate of Marginal Standing Facility (MSF) by 100 bps to 10.25 percent as against 9.25 percent currently. Hence, the difference between repo rate and MSF stands at 300 basis points compared with 200 bps currently. Banks can borrow money pledging their excess SLR (Statutory Liquidity Ratio) bonds. Most of the banks are holding excess SLR above 23 percent. Hence, lenders can borrow money using MSF route.
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