Bid to sell bonds only partially successful.
By R Chandrasekaran
CHENNAI: The government and the Reserve Bank of India’s efforts to defend the Indian currency seems to face several hurdles since the central bank’s move to sell bonds worth Rs.120 billion has failed to generate the kind of interest it would have liked it to be.
The RBI could mop up only one-fifth of the Rs.120 billion worth of bonds put on sale on Thursday in an effort to drain cash from the market and defend the Rupee. It could accept bids only for about Rs.25.32 billion. This leaves the central bank to look out for alternative measures to restrict the volatility in the Indian rupee in the forex market.
Only on Monday, the Reserve Bank enforced a cap of Rs.750 billion on overnight borrowing limit by the banks though it was ready to offer more money subject to paying higher interest rates to the central bank. The Indian currency had lost about 10 percent since May due to combination of factors such as strengthening USD, the U.S. Fed’s move to stop easy money policy in the later part of the current calendar year, foreign institutional investors’ (FIIs) taking out money from the Indian capital markets and the failure to attract more foreign direct investment.
The primary reason for the bombing of the RBI’s move to sell bonds is that dealers demanded higher yields, which it does not want to. The central bank has also proposed to put on sale the government bonds on Friday and next Wednesday.
If the RBI fails to mop up the amount, then it will have to find alternative ways to curb the volatility of the Rupee. One possible scenario is increasing the cash reserve ratio or CRR. This means the banks requires having more cash than the current norms. The other possibility is raising of short term rates. Both these move are expected to have short term impact on the growth prospects of the economy.
The central bank will be holding its review meeting on July 30. The earlier expectation of rate cut has completely vanished and now there seems to be a view gaining ground that the RBI may hike interest rates to limit money supply.