The RBI sought to end speculative trading seen in the currency market in the November-December period, by announcing measures such as withdrawal of the facility to cancel and rebook forward contracts by resident and foreign institutional investors and reducing the overnight open position limit of banks authorised to deal in foreign exchange.
In fact, the day after the RBI announced its measures, the rupee saw one of its biggest ever gains when it surged by 140 paise in intra-day trade and ended over 100 paise higher from the previous close.
As an additional step, the RBI first increased the interest rate on Non-Resident (External) rupee deposits and Non-Resident Ordinary (NRO) Accounts, and later on deregulated the interest rates all together. Banks were quick to follow it up by announcing higher interest rates on these deposits.
According to Mr N. S. Venkatesh, Chief General Manager and head treasury, IDBI Bank, this move will definitely bring in more foreign currency due to which rupee will strengthen and imported inflation will come down.
“As long as the interest rates in India are lower than in the overseas markets, we will see interest for these deposits. When huge amounts of money flow in, it is possible the arbitrage could reduce. But until then we are likely to see good inflows,” Mr Venkatesh said.