Remains to be seen if Rupee can gain in value.
By R Chandrasekaran
CHENNAI: The Reserve Bank of India’s efforts to arrest the sliding Indian currency has taken stock markets by surprise and it reacted unfavorably by dragging down the stocks of financial sector.
The central bank has taken steps to control excessive speculation of Indian currency in the forex market by increasing the costs of short-term borrowing to banks. At least two percentage points were raised by the RBI on Monday night that will impact the bank’s borrowing costs.
While the RBI has kept a ceiling of Rs.750 billion for overnight borrowing by banks, it said that if the banks want more money, then they may have to pay higher interest rates to the central bank. Since the banks current requirement was Rs.930 billion for overnight borrowing, they may have no alternative but to pay higher interest to meet the demands.
The banks, in turn, will pass on the additional burden to the borrower, which will be corporate. This will definitely hit the economy at least until the RBI eases the overnight borrowing limit and the additional interest. Interestingly, some of the brokerages have reduced the economic forecast for the current fiscal year as a fall out of the RBI’s move.
The central bank is also intending to sell bonds worth Rs.120 billion to drain cash from the market. The RBI has been taking steps to limit the sliding Indian currency in the last few weeks but succeeded only to a limited extent. They have also warned speculators and conducted surprise checks.
While the efforts yielded results on Tuesday, as the Rupee has strengthened, it provided big blow to some of the private and public sector banks such as Yes Bank, Kotak Mahindra Bank, Allahabad Bank, and infrastructure lender IDFC that had lost over three – eight percent during the stock market trading in both the exchanges.
The finance minister P Chidambaram has defended the RBI action saying that the measures were aimed at curbing excessive speculation and volatility in the Indian currency. He added that it cannot be read as a lead for any policy changes in rates. However, it remains to be seen whether the Rupee can continue to gain.