RBI unveils new steps to drain out cash and stem rupee's slide

Economic Affairs Secretary Arvind Mayaram ruled out issuance of sovereign bonds

Finance Minister P Chidambaram might be readying to announce steps to help the battered rupee and rein in the widening current account gap, while the Reserve Bank of India (RBI) has decided to drain out more liquidity from the system to make the Indian currency dearer.

The central bank would auction Rs 22,000-crore government cash-management bills every Monday, it said in a statement, without specifying the duration for which this would continue. The period would be announced a day before the auction, it said.

As liquidity will get further squeezed and bond yields rise, the Fixed Income Money Market and Derivatives Association of India (Fimmda) has decided to remove the price on banks for Monday and Tuesday trading sessions.

The move has come even as the liquidity situation has eased on the back of high government spending. The RBI measures to drain out liquidity, announced on July 15, had failed to stem the rupee’s weakness and the currency had gone on to hit a fresh all-time closing low of 61.30 a dollar on Wednesday. Liquidity also eased with the overnight rates falling below the double-digit mark. On Thursday, the rupee gained 42 paise over its previous close to 60.88 against a dollar.

The government, on the other hand, might be unveiling more measures to attract inflows, Arvind Mayaram, economic affairs secretary of the finance ministry said on Thursday.

Wait till the end of the week... The finance minister will be talking about this later,” he said when asked about the likely steps the government would take to address the exchange-rate volatility.

He, however, clarified there was no plan to go for sovereign bond issuances.

“The government has not planned any sovereign bond; I don’t know why the media has the feeling there will be a sovereign bond,” he said after attending RBI’s board meeting.

Earlier, Governor D Subbarao had also expressed his reservations about issuance of such a bond.

“A sovereign bond issue would compromise financial stability. So, in RBI views, the cost of sovereign bond issue, in the current juncture, outweigh the benefits. We should be doing sovereign bond issue, if at all, from a position of strength, at a time when we are a lot less vulnerable,” Subbarao said.