With the rupee continuing to lose value — it hit a lifetime intra-day low of 61.81 to the dollar on August 6 – the Reserve Bank of India (RBI) on Thursday announced more measures aimed at arresting the fall in the currency. The central bank will suck out R22,000 crore of liquidity every week by selling cash management bills (CMBs), it said in a release on Thursday. This is in addition to regular R15,000 crore auction of government securities conducted every week. The first auction will be held on two days, August 12 and August 13 with the maturity date for the CMBs being September 17.
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 don’t mind the accompanying costs on growth, their priority is the exchange rate,” Dave added.
The RBI’s 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%. Thursday’s 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