An auction every Monday.
By R. Chandrasekaran
CHENNAI: The Reserve Bank of India has come out with fresh measures to protect the Indian currency from a further slide. The Indian rupee witnessed a life time low of 61.80 against the USD during the week triggering deep concerns over the drop. The RBI move comes after its earlier measures failed to yield the expected results.
The central bank announced that it will auction Rs.220 billion of government cash management bills every Monday. However, the RBI preferred not to spell out the time frame for the auction leaving the market to speculate whether it will remain in force until the volatility in the Indian currency comes down or alternatively the rupee gets stabilized somewhat.
The Indian rupee has slipped over 14 percent since May. The volatility and the weakness has been significantly higher after the U.S. Federal Reserve chairman Ben Bernanke announced that it will commence the reduction of monthly bond buying program with a view to close it by the middle of next year.
This triggered outflow of money from the emerging markets, including India as the bond yield started increasing in the U.S. Also, Standard & Poor’s also upgraded the U.S. sovereign credit rating with less chance of a downgrade threat at least in the next two years.
The RBI came up with measures on July 15, increasing the short-term interest rates. This was followed by another step of measures on July 23. The central bank capped the overnight borrowing limit, and if the banks want more money they will have to pay higher interest rates, thereby indirectly hiking the interest rates. A few private sector banks have already increased interest rates and the public sector banks seem to be waiting for the government’s unofficial nod to increase the interest rates. Earlier, the government had advised the banks not to hike the interest rates.
The latest measures came amidst investor expectations of more measures from the government to invite foreign funds flow with a view to narrow the higher current account deficit.
The central bank disclosed that the guidelines for the auction will be issued separately and that the sale of each cash management bill details will be revealed just a day before the auction.
The government has also announced various sops to lift the exports. It remains to be seen whether the latest efforts taken by the RBI will yield the expected results and stabilize the Indian currency.