The rupee has lost 12% since April, a little less than the 13% in the Brazilian real though considerably more than the 6% for the South African Rand.
This means R37,000 crore will be pulled out from the markets next week. While some of this will come back as the CMBs mature, the idea seems to be to maintain liquidity in a manner that call rates before the MSF rate of 10.25%. On Thursday, the call rate was hovering around 10.13%.
The message is clear and it is that the RBI will leave no stone unturned to anchor exchange rate expectations, said Hitendra Dave, head of global markets at HSBC. They dont mind the accompanying costs on growth, their priority is the exchange rate, Dave added.
The RBIs measures so far have resulted in money becoming more expensive; on Tuesday, HDFC Bank hiked it base rate by 20 basis points to 9.8%. Thursdays move is expected to drive up overnight call money rate back to levels of 10.25% and perhaps even higher; that, in turn, will drive up short-term money market rates for products like commercial paper (CP) and certificates of deposit (CD). Rates on both CDs and CPs have risen by 100-150 basis points since July 15. Government bond yields too may rise further, dealers said.
The yield closed at 8.14% on Thursday, down from recent highs of 8.3%, but much above the 7.6% levels before the RBI rolled out the liquidity tightening measures.
However, dealers are sceptical over the impact of RBIs latest measures on the rupee.
There could be some positive impact on the rupee. But it depends on how global conditions are also panning out, said the head of trading at a foreign bank. If the government also announces steps on imports or on the capital account, we could see something positive on the currency, he said.
Cash management bills, by definition, are short-term instruments through which the government meets its immediate cash flow mismatches. The RBI began issuing CMBs in July after a gap of over two years as part of its rupee-centric measures. The currency has recovered slightly since then and settled at 60.88/$ on Thursday; on Wednesday, the rupee ended at a new closing low of 61.30.
Thursdays measures follow the rupees fall to a new all-time low of 61.81/$ on Tuesday despite the central banks earlier liquidity tightening measures.
On July 15, the RBI had put a ceiling on the amount that banks could borrow from the special window at Rs 75,000 crore, simultaneously hiking the marginal standing facility rate to 10.25%. Subsequently, on July 23, the central bank capped banks borrowings from the repo tender at 0.5% of their deposits. The measures led to a brief recovery of the rupee but the currency slipped again.
Separately, ahead of the RBI measures, a top government official had said that the government, in consultation with the Reserve Bank of India will announce more measures to curb the rupees depreciation by the end of the week.
I think you should wait till the end of the week, said Arvind Mayaram, secretary at the Department of Economic Affairs after the conclusion of the RBI board meet. Mayaram refused to provide any details of the measures but indicated that the measures may not include a sovereign bond issue.