RBI steps in to stem steep rupee slide

FCNR (B) interest rate ceiling hiked; Re recovers from 53.92 to close at 53.47

With the rupee coming under pressure and inching closer to the 54 level,the Reserve Bank of India (RBI) on Friday announced a series of steps to augment foreign currency flows and stem the currencys slide.

On Friday,after the market closed for trading,the RBI raised the interest rate ceiling on Foreign Currency Non-Resident (FCNR (B)) deposits of banks from 125 basis points (bps) above the corresponding LIBOR/Swap rates to 200 bps for maturity period of 1 year to less than 3 years,and to 300 bps for maturity period of 3 to 5 years. Further,the ceiling rate on export credit in foreign currency,which was constraining the availability of credit to exporters in foreign currency has been deregulated by allowing banks to freely determine their interest rates on such credit.

Earlier in the day,the rupee came very close to the 54 level but recouped days most of the losses to end at 53.47/48,down six paise against the US currency,after RBIs suspected intervention in the forex market.

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The rupee opened sharply lower at 53.65/66 and further plunged to 53.92 amid sluggish equities and fears of more capital outflows after reports that government is reviewing taxation treaty with Mauritius. However,suspected strong intervention by the Reserve Bank at days lower levels forced exporters to cover their short positions. It helped the rupee rebound to a high of 53.4350 before ending at 53.47/48.

The rupee is down about 9 per cent since March and saw precipitous falls in the last three sessions before recovering its daily losses on Friday. The RBI is believed to have stepped in to the market to defend the currency in the last three days,traders said.

The currency is down 2.3 per cent for the week,putting it close to the record 54.30 against dollar in December.

Traders said the RBIs latest moves may not be enough to stem further near-term weakness. Some foreign fund inflows will be augmented because of this step,but I dont think it is enough to stop the downward fall of the rupee, said a banker.

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