Thursday, August 8, 2013

RBI unveils new steps to support rupee

The Reserve Bank of India (RBI) announced new measures on Thursday to drain cash from the financial system in a bid to address volatility in currency markets, after a slew of steps announced last month failed to prop up the battered rupee.

The RBI will auction Rs. 22,000 crore of government cash management bills every Monday, it said in a statement, without specifying for how many weeks the sales would last.

The measures come after the RBI unveiled measures on July 15, including raising short-term interest rates, in a bid to drain cash from the financial system, and followed up with additional steps on July 23.

However, those steps failed to prop up the rupee, which has fallen 1.6 per cent since the initial measures were announced mid-month and hit a record low of 61.80 on Tuesday.

The latest additional cash-draining steps were announced amid investor expectations for government measures to attract foreign inflows in a bid to help narrow a record high current account deficit, which has been the key source of stress on the rupee.

Expectations a package will be announced over the weekend pushed the rupee on Thursday to its biggest single-day gain in two weeks.

It closed at 60.88/89 per dollar, compared with 61.30/31 on Wednesday.

The RBI's measures have raised concerns about their impact on India's economy which is growing at 5 per cent, its slowest pace in a decade.

Traders said they expect the new measures to push up bond yields on Monday. Friday is a public holiday in India.

The RBI said on Thursday that details of each cash management bill sale will be announced a day before the auction. Detailed guidelines will be issued separately, the RBI said.

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