Reserve Bank of India’s effort to control fall of domestic currency on Tuesday evening born fruit on Wednesday rupee not only emerged 63 paise stronger but also closed at a one-month high of 59.13 against the dollar.
But this step from the central bank drew sharp reaction from banks as SBI State Bank of India Chairman Pratip Chaudhuri on Tuesday asked RBI not to choke liquidity and instead raise interest rate, if needed, and called for transparency in managing rupee. “Whenever the central bank needs to defend the currency or prevent the inflation from going out of hand, please increase the interest rate, don’t choke liquidity,” SBI Chairman Pratip Chaudhuri said in Kolkata on Tuesday during inauguration of the FICCI-organised Banking Conclave.
SBI Chairman in the last year’s banking conclave had started a debate by seeking to abolish CRR to enhance liquidity in the banking sector for more productive use. To curb liquidity to contain exchange rate volatility and rupee slide, the RBI yesterday had reduced the liquidity adjustment facility (lAF) for each bank from 1 per cent of the total deposits to 0.5 per cent, thus limiting the access to borrowed funds from the central bank.
In another measure to suck out liquidity from the system, RBI had asked banks to maintain higher average CRR (cash reserve ratio) of 99 per cent of the requirement on daily basis as against earlier 70 per cent. CRR is portion of deposits that banks are required to keep with RBI. According senior bankers, the measures could suck out Rs 4,000-Rs 5,000 crore from the system. Chaudhuri said his suggestion would be that if you face this (rupee volatility) situation, do it in a frank, fair and transparent manner without any cover.
“Today the repo rate is 7.25, but funds are not available and from a window money is available at 10.25 per cent. It doesn’t help anybody in covering or camouflaging the repo rate. If the repo rate has to be taken to 10.25, so be it but do it in a transparent manner,” he said. He said that the RBI has made it very clear that at the current situation its priority number one is to stabilise the rupee... And for this some liquidity tightening measures have been brought in. “We have been told that these measures are temporary and wish they are so,” the SBI chief said.
Back to rupee, the domestic currency opened strong at 59.49 a dollar from the previous close of 59.76 at the Interbank Foreign Exchange Market and then touched a low of 59.59. later, it rebounded to a high of 59.01 before closing at 59.13, a rise of 63 paise or 1.05 per cent. “The gains in the currency are mainly attributed to the recent measures announced by the central bank,” said Abhishek Goenka, founder & CEO at India Forex Advisors. “The central bank is taking every possible step to tighten the liquidity in the market and providing support to the weak rupee.” The rupee also got support as the euro was seen sustaining above $1.32 levels, taking cues from robust PMI numbers released by Germany and the overall euro zone, Goenka said. Rupee, one of the worst-performing currencies in emerging markets, fell from 53.80 levels in April to a historic low of 61.21 on July 8 on capital outflows and a widening current account deficit. A weaker rupee makes imports costlier.
Banking stocks, hit hard by the RBI’s steps, led the benchmark S&P BSE Sensex lower for the first time in six days and the index declined 1.04 per cent at the close. The benchmark six-month forward dollar premium payable in December flared up to 248-254 paise from Tuesday’s close of 221-224 paise. Far-forward contracts maturing in June jumped to 492-497 paise from 448-1/2-451-1/2 paise. The RBI fixed the reference rate for the dollar at 59.4465 and for the euro at 78.4355. The rupee rebounded to 90.78 against the pound sterling from the previous close of 91.70 and firmed up to 78.29 against the euro from 78.76. It shot up further against the Japanese yen to 59.11 per 100 yen from the previous close of 59.75.