In a bid to contain speculation in the foreign exchange market and arrest the slide of the rupee, the Reserve Bank of India, on Thursday announced further liquidity draining measures.
The RBI said it will auction Government of India Cash Management Bills (CMBs) for a notified amount of Rs 22,000 crore every Monday.
CMBs are short-term instruments normally issued by the Government to overcome temporary cash flow mismatches. However, the RBI is using them to modulate liquidity in the banking system.
In the past few days, the rupee has been hitting new lows, either intra-day or at closing. On Thursday, however, it recovered to close at 60.88 a dollar against the previous close of 61.30 (all-time closing low) amidst expectations the government would announce fresh steps to support the local currency. A rebound in local equities, weak dollar overseas and fresh dollar sales by exporters also aided the rupee.
Imports gets costlier
Since the beginning of the current financial year, the rupee has depreciated by about 12 per cent, making imports costlier. With almost 80 per cent of India’s crude oil requirements being met through imports, the depreciation of the rupee would stoke inflation further.
Besides, slowdown in exports has widened the trade deficit (the excess of imports over exports), resulting in the rupee coming under pressure.
Last month, the RBI had announced liquidity tightening measures, whereby the amount of money that banks can borrow from it has been reduced drastically. The amount of funds that banks need to maintain on an average daily basis with the RBI has also been raised.
The RBI’s liquidity draining measures have pushed up short-term interest rates.
“The latest liquidity draining measures by the RBI, coupled with the likely announcement of measures by the Government to enhance inflow of dollars/stem outflows, could have a salubrious impact on the rupee,” said S. Srinivasaraghavan, Head-Treasury, Dhanlaxmi Bank.