Also, foreign institutional investors (FIIs) bought limits for $10-billion worth of bonds on Tuesday, and although its not certain they will buy the bonds, the attorney generals opinion on the sale of the residual stakes in Balco and Hindustan Zinc paves the way for the government to mop up $3 billion.
The RBIs press release on Tuesday no longer talks of the need to restore stability to the foreign exchange market as the one on July 15 did. Indeed, it speaks of having achieved the immediate objective of raising short-term interest rates, as evidenced by the money market rates anchoring to the marginal standing facility (MSF) rate of 10.25% and adds that it is important to ensure that liquidity tightening does not harden longer-term yields sharply and adversely impact the flow of credit to productive sectors. To infuse liquidity, the RBI announced open market purchase operations of long-dated gilts for R8,000 crore on Friday, saying more purchases of bonds would be calibrated, both in quantum and frequency, with the markets needs.
The central bank also chose to give banks a reprieve on the Rs 50,000 crore of estimated mark-to-market losses that they would have had to take on their investment portfolios allowing them to retain their SLR holdings in the hold-to-maturity (HTM) category at 24.5% for the time being they had earlier been asked to bring these down to 23% of their net demand and time liabilities. The RBI also allowed banks to shift gilts from the AFS (available for sale) and HFT (held for trading) categories to the HTM category up to 24.5%, as a one-time measure.
Meanwhile, although both the bond and currency markets got off to rough starts on Tuesday the currency fell through the 64 mark, hitting a historic low of 64.13 while the benchmark yield surged to Lehman levels of 9.48% there was less panic by evening with the rupee back at 63.25 and the yield closing below 9% at 8.92. The RBI is understood to have intervened in the market to the extent of $250-300 million. The loss in the equities too, which fell for the third straight session was marginal at 61.48 points, leaving the Sensex at 18,246.04, although the mood was downbeat with JPMorgan downgrading the market to neutral from overweight, citing the weakness in the currency, high interest and lower growth and Citigroup paring its target for the Sensex to 18,900 for December 2013 from 20,800 saying the currency remained weak despite measures to support the rupee.
Rating agency Moodys maintained its stable outlook on Indias sovereign rating saying the present depreciation in rupee, weaker economic growth and the fiscal and current account deficits have already been taken into account in the Baa3 sovereign rating. S& P too maintained its negative outlook on Indias BBB- sovereign credit rating saying however, that recent measures taken to restrict capital outflows had increased uncertainty among investors. Moodys stated that while the current rupee depreciation may be a new development, the factors that underpin it are not. The current sovereign rating of Baa3 incorporates the macroeconomic challenges of weaker growth, the steep plunge of the rupee and the twin deficits, the agency said. Recent measures taken to restrict capital outflows have increased uncertainty among foreign and domestic investors, said Kim Eng Tan, senior director, sovereign and international public finance, Asia Pacific at S&P. If the uncertainty continues, business financing conditions could deteriorate further and investment growth could slow further, Tan said.
Indias long-term growth prospects could weaken on a sustained basis, with negative implications for the sovereign credit fundamentals, he said. It is, however, too early now to tell if this scenario will come to pass. This will be largely dependent on policymakers reactions to these latest developments, Tan said.