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RBI announces new measures to support rupee

The Reserve Bank of India announced fresh measures today to reduce volatility in the forex market and aid the ailing rupee which hit a new record low against the dollar this week.

business Updated: Aug 09, 2013 03:00 IST

The Reserve Bank of India announced fresh measures on Thursday to reduce volatility in the forex market and aid the ailing rupee which hit a new record low against the dollar this week.

The RBI said it would auction Rs 220 billion ($3.6 billion) worth of government cash management bills once a week every Monday, in a move to suck out cash from the financial system.

The RBI said in a statement that the sale of the bills, which typically mature in 91 days, would help in "effective liquidity management", but it did not specify for how many weeks the sales would go on.

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The measures are the latest by the RBI to bolster the rupee, which hit a new lifetime low of 61.80 to the greenback on Tuesday. The rupee is among the worst performing currencies in Asia this year.

The rupee on Thursday closed at 60.88 to the dollar.

Economists welcomed the measures but said the government needed to introduce new pro-market reforms to boost the sluggish economy.

"(Thursday's) measures are an effort to siphon off excess liquidity from the system and will help the rupee," said Shubhada Rao, chief economist with Yes Bank.

"But liquidity tightening measures are not enough. Growth will have to become a priority," she told AFP.

India this week named former International Monetary Fund chief economist Raghuram Rajan as its next central bank governor as it grapples with the plunging currency and decade-low growth of 5.0%.

The RBI last month announced steps to bolster the rupee, including raising short-term interest rates and lowering the amount a bank can borrow or lend under its daily liquidity limit.

The depreciating rupee causes inflation by raising the cost of everything India imports from crude oil to chemicals and pulses.

The rupee has been battered in recent months, shedding as much as 12.83% in 2013, amid slackening domestic growth, rising overseas fund outflows, weak exports and a high current account deficit.

India on last Thursday relaxed foreign investment rules in the massive retail and other sectors in new reforms aimed at drawing funds from overseas. Similar reforms were announced in September last year.