Rupee loses 107 paise on RBI’s mixed signals

Mumbai: The rupee fell by 107 paise (1.8%) to 60.49 on Tuesday, its third-lowest close ever, after RBI maintained the status quo on interest rates and failed to come up with any new measures to support the currency. 

    Contradictory signals from the central bank on the possible duration of its liquidity tightening measures announced earlier this month led to its resolve on the rupee being tested by the foreign exchange market. 
    The stock markets also gave a thumbs down to the policy with a 250-point drop in the sensex. The rupee fell soon after RBI's policy statement said that its liquidity tightening measures would be rolled back in a calibrated manner as stability is restored to the foreign exchange market. The statement surprised markets since the rupee was steadily weakening and inching toward 60 levels despite two rounds of liquidity tightening aimed at buffering the rupee. 
    The fall of rupee below the psychological mark of 60 on Tuesday, the steepest in past three weeks, erased all gains it made since the RBI first announced the measures to defend the rupee on July 15. It is now close to the all-time low of 61.21 hit early this month. 
    In what could be his last monetary policy review, RBI governor D Subbarao, also came out with a strong opposition to a sovereign bond issue and rubbished any need to approach the IMF. RBI firm on stemming rupee slide, says guv 
Mumbai: Taming the exchange rate is RBI's top priority as by its own admission a 10% weakening of the rupee adds over 1.2% to inflation due to higher cost of imports. The two rounds of measures capped bank borrowings from RBI to 0.5% of their deposits. The norms also forced banks to maintain 95% of their cash reserve requirements on a daily basis as against a quarterly average earlier. These short-term measures have pushed up short-term rates above 10% and yields on 10-year bonds have crossed 8%. If these conditions persist till Septemberend, banks stand to make big losses through provisions for depreciation on bonds. 
    Subbarao, however, denied that RBI could be seen to be vacillating on its resolve to stabilize the exchange rate. "We have not used the word temporary very advisedly because RBI does not want to get locked into a timeframe on how long these measures might be necessary. We are determined to control volatility in the exchange rate. There will be consequences for this; there will be pain in the economy. Somebody will have to bear these costs which are inevitable and unavoidable. But we will persist with these measures and implement them consistently in order to achieve the intended results," said Subbarao, whose term as governor ends on September 4, 2013. 
    "In our view the government could increase import duty on select commodities, such as electronic goods, to reduce the import bill," said Samiran Chakraborty, head of regional research, South Asia in a research report. 
    RBI left the policy repo rate at 7.25% and retained cash reserve ratio requirement at 4%. It also cut its growth forecast for the year to 5.5% from 5.7% earlier. Bankers, under pressure from the finance ministry, have committed to hold rates. However, if the rates persist for 6-8 weeks, most will be forced to review their rates.