As a result of RBI’s move to uphold rupee, Banking industry has come under pressure.
Late evening on Monday 15 July, 2013, Reserve Bank of India finally steps in to support
rupee which has been trading right about 60. Global Investment Bank Credit Suisse thinks Rs 55 against a dollar is a fair value of our currency.
The Indian rupee recovered by around a percent in the morning trade on Tuesday which closed at about 59.89 Rupee against Dollar on Monday. RBI has decided to push up short term borrowing rates in the money market to restrict easy access to short term money for Banks that is being put in speculative investments in dollar. RBI has increased banks short term borrowing through Marginal Standing Facility and Bank rate to 10.25% (an increase by 2%). This will discourage banks to borrow rupee (cheaply) to invest in dollar (in the forward market). This should ideally give rupee a breather. However, this move of the regulator will trigger higher borrowing costs for the the companies and pressure the economy as a whole.
RBI’s current overnight lending to banks stand at over Rs 93,000 crore which will be now capped at Rs 75,000 crore. The RBI had been investing in bonds lately to offer liquidity in the market but now has decided to sell Rs 12,000 crore worth of bonds this week to suck liquidity from the banking system.
“The market perception of a likely tapering of US quantitative easing has triggered outflows of portfolio investment. Consequently, the rupee has depreciated markedly in the last six weeks. Countries with large current account deficits, such as India, have been particularly affected despite their relatively promising economic fundamentals,” the RBI said in a statement.
“The exchange rate pressure also evidences that the demand for foreign currency has increased vis-a-vis that of the rupee in part because of the improving domestic liquidity situation,” the RBI added.