The rupee notched up its biggest gain in more than a fortnight Tuesday after the Reserve Bank the previous night unleashed a slew of measures to contain rupee volatility by sucking out liquidity from the system, while stock markets tumbled on concerns the measures will push up borrowing cost for banks. The rupee surged 58 paise, the most since June 28, to end at 59.31 against the dollar, a gain of almost 1 per cent. The local currency had closed yesterday at 59.89. The rupee had plunged to a record low of 61.21 on July 8.
The RBI last night curbed borrowing by banks as part of measures to restore stability to the foreign exchange market. The marginal standing facility rate was raised to 10.25 percent from 7.25 percent and the bank rate to 10.25 per cent with immediate effect, RBI said in a late Monday statement. It limited the overall allocation of funds under the liquidity adjustment facility to 1 per cent of the net demand and time liabilities of the banking system, reckoned as Rs 75,000 crore, with effect from July 17.
The RBI also said it will conduct open market sales of government securities of Rs 12,000 crore on July 18. "As money market liquidity tightens, the cost of carrying a speculative position in anticipation of further rupee weakness
rises significantly," said Barclays analyst Siddhartha Sanyal. The RBI's steps rattled the stock markets on concern they would lead to an increase in interest rates.
The benchmark Sensex fell 183.25 points, or 0.91 per cent, to close at 19,851.23, snapping a three-day winning streak. Financial stocks, including SBI, ICICI Bank, HDFC and HDFC Bank, slumped, as did rate-sensitive auto stocks. Overall, Rs 61,000 crore in investor wealth was wiped out. "Markets came in for heavy selling pressure following concerns over RBI's initiatives… Financial companies that are dependent on short-term wholesale funding are expected to be the most impacted by steps to curb liquidity," said Sanjeev Zarbade, vice-president at Kotak Securities.
The RBI's measures came after high-level meetings yesterday between the Prime Minister and the Finance Minister, followed by discussions with Governor D Subbarao. In the bond markets, government securities extended their fall on selling pressure from banks and corporates, while call money rates ended lower at the overnight call money market due to lack of demand from borrowing banks.
"Latest RBI measures are likely to drive the overnight fixing rate towards the upper corridor, i.e. 10.25 percent, from 7.25 per cent…Any backup in long-dated government bond yields should be seen as an opportunity to establish long positions," said Andre De Silva, of HSBC. According to the RBI, the market perception of likely tapering of US quantitative easing has triggered outflows of portfolio investment, particularly from the debt segment. "The exchange rate pressure also evidences that the demand for foreign currency has increased vis-a-vis that of the rupee in part because of the improving domestic liquidity situation."
Finance minister P Chidambaram said the RBI's measures have nothing to do with the upcoming monetary policy review and may not impact interest rates of banks. The steps were aimed at checking excessive volatility and speculation in the forex market, he said. Last week, the RBI had asked oil companies to source all of their monthly needs of 8-8.5 billion dollars for import of oil from a single public sector bank. It also barred banks
from trading in currency futures and exchange-traded currency options market on their own.
Bank of America Merill Lynch today revised GDP growth forecast lower to 5.5 per cent for this fiscal from 5.8 per cent earlier, saying the Reserve Bank's tightening measure is likely to push back lending rate cuts.
