Sharp fall in rupee spurs India to step in | South China Morning Post
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Sharp fall in rupee spurs India to step in

PUBLISHED : Wednesday, 17 July, 2013, 12:00am
UPDATED : Wednesday, 17 July, 2013, 6:06am

India stepped up efforts to help the rupee after its plunge to a record low, raising two interest rates in a move that escalates a tightening in liquidity across most of the biggest emerging markets.

The Reserve Bank of India announced the decision late on Monday after the central bank's governor, Duvvuri Subbarao, earlier in the day cancelled a speech to meet the finance minister.

The bank raised two money-market rates by two percentage points and plans to drain 120 billion rupees (HK$15.7 billion) through bond purchases.

Rupee forwards jumped the most in 10 months.

"The importance of this move is that it signals that the RBI is willing to act and make it much more costly to short the rupee," JP Morgan Chase analysts Jahangir Aziz and Sajjid Chinoy said in a note. "These measures are only preconditions to the RBI squeezing rupee liquidity to engineer much higher short-term interest rates."

The central bank increased the marginal standing facility and the bank rate to 10.25 per cent from 8.25 per cent.

The monetary authority said it would conduct open market sales of government bonds worth 120 billion rupees tomorrow, a step that would drain cash from the economy.

"These moves will not only push up interest rates but also lead to tightened liquidity conditions," said Prasanna Ananthasubramanian, an economist at ICICI Securities. "It's quite surprising that the central bank has used these measures to support the rupee at a time when the economy is in such a bad state."

India's economy expanded 5 per cent in the fiscal year ended March, the slowest since 2003.

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