Is Governor Duvvuri Subbarao playing big shots on a bad pitch? The Indian rupee continues to remain uncomfortably close to its record-low levels even though it had gained nearly 1% since the Reserve Bank of India (RBI) announced monetary tightening measures last week.
With the chances of a sovereign bond issue appearing dim for the time being, currency and equity market analysts are now waiting for cues from the government and the RBI on the next set of measures to prop the rupee that has fallen more than 13% since May. A fresh sign came on Monday when the RBI tightened norms on gold to make it focused on end-use and not speculation.
Last week, the RBI moved in to check speculation in the currency market and fixed a daily limit on how much banks can borrow from the central bank — 1% of banks’ deposit base or Rs 75,000 crore — for the entire banking system. If a bank requires more funds, it can borrow emergency money using the marginal standing facility (MSF) at a sharply costlier interest rate of 10.25% from 8.25% earlier.
The central bank also sold government bonds in the secondary market to suck out liquidity from the system.
“Whether the measures will have a sustainable impact remains to be seen. There is a risk that they could backfire. India’s growth is already very weak and tighter domestic liquidity will worsen financial conditions,” said Sonal Varma of broking firm Nomura.
The measures have also raised questions on the RBI's real intent and whether these measures are temporary.
“We believe that it can only influence the pace of currency depreciation, exacerbating macro stability risks,” Chetan Ahya of Morgan Stanley said.