Bankers have warned that unless more measures are taken to fix the current account deficit, the impact on the currency would not only be limited, but borrowing costs could go up, eventually hurting the economy.
"A sustained impact on the rupee hinges on follow-up measures. Without additional measures, the impact of this measure in isolation would be limited," said Brijen Puri, head of trading at JP Morgan.
On Monday, RBI announced a cap of R75,000 crore on banks borrowings from the daily repo tender noting easy rupee liquidity was aiding strong demand for the dollar. Also, the central bank hiked the Marginal Standing facility rate to 10.25%. Indeed, measures elicited only a modest rise of rupee but pummelled bonds and stock prices. The currency gained 1.30% to settle at 59.31/$, off 3.20% from the all-time low of 61.21/$.
But the 10-year bond yields surged 57 basis points, the single largest intraday rise in recent times while equity markets weakened 1%. I hope policymakers will monitor and track the intended benefits which is the rupee appreciation versus the collateral damage to the fixed income market and potentially also to the equity market and growth," said Hitendra Dave, head of global markets at HSBC.
Analysts have already pruned their growth estimates for 2013-14 based on RBI's measures. While bankers assured lending rates won't go up, a rise in their cost of borrowing could push them to make short-term loans costlier.
RBI may have won the battle over speculation through the latest measures, but the war could be still on. According to currency dealers, speculation involving non-deliverable forward market is far larger and Monday's measures are unlikely to affect these. While no official estimate of NDF market size is available, most dealers believe it to be at least twice as large as the onshore market and clocks a daily average turnover of $40 billion.
Easy liquidity does encourage speculation. It is not call money but the easy liquidity that is the problem," said Parthasarthy of HDFC Bank.