RBI squeezes money again to back rupee
With just one more week to go for the next monetary policy review, Reserve Bank of India governor Duvvuri Subbrao moved to suck out money from the banking system again on Tuesday with a complex web of measures to shore up the rupee and end volatility in the foreign exchange market.
RBI put a quota on an emergency borrowing system under which commercial banks borrow from it, having already increased the rate at which they do last week. It listed measures under an intent to “contain volatility in the foreign exchange market.”
The central bank limited banks from accessing the liquidity adjustment facility (LAF). RBI also set the overall limit for borrowing under the LAF window at 0.5% of deposits from 1% earlier, for each bank.
RBI has also directed banks to maintain 99% of their daily cash reserve ratio requirements, as against 70% now, which would also reduce liquidity.
"The measures are aimed at squeezing liquidity from the system," said Soumya Kanti Ghosh, chief economic adviser, SBI.
The RBI is walking a tightrope. If it squeezes money to curb forex trading speculation, it also squeezes industrial loans.
"While being appreciative of the RBI's need to support the rupee, CII is concerned that excessive tightening in liquidity coming through successive announcements would be detrimental for the industry as investment and consumption demands are already extremely weak," said Chandrajit Banerjee, director-general, CII, calling the measure as counterproductive.