Rupee surges, stocks slip on RBI steps to calm forex markets

The rupee notched up its biggest gain in more than a fortnight today after the Reserve Bank of India took steps to address exchange rate volatility by tightening liquidity, while stock markets tumbled on concerns the measures will push up cost of borrowings for banks.
The rupee surged 58 paise, the most since June 28, to end at 59.31 against the dollar, a gain of almost 1 per cent. The local currency had closed yesterday at 59.89. The rupee had plunged to a record low of 61.21 on July 8.
The RBI last night curbed borrowing by banks as part of measures to restore stability to the foreign exchange market.

The Marginal Standing Facility rate was raised to 10.25 per cent from 8.25 per cent and the bank rate to 10.25 per cent with immediate effect, according to an RBI statement.
It limited the overall allocation of funds under the liquidity adjustment facility to 1 per cent of the Net Demand and Time Liabilities of the banking system, reckoned as Rs 75,000 crore, with effect from July 17.
The RBI also said it will conduct open market sales of government securities of Rs 12,000 crore on July 18.

"As money market liquidity tightens, the cost of carrying a speculative position in anticipation of further INR weakness rises significantly," said Barclays analyst Siddhartha Sanyal.

The RBI's steps rattled the stock markets on concern they would lead to an increase in interest rates.
The benchmark S&P BSE Sensex fell 183.25 points, or 0.91 per cent, to close at 19,851.23, snapping a three-day winning streak. Financial stocks, including ICICI Bank, SBI, HDFC and HDFC Bank, slumped, as did rate-sensitive auto stocks. Overall, Rs 61,000 crore in investor wealth was wiped out.
"Markets came in for heavy selling pressure following concerns over RBI's initiatives...Financial companies that are dependent on short-term wholesale funding are expected to be the most impacted by steps to curb liquidity," said Sanjeev Zarbade, Vice President- PCG Research, Kotak Securities.

The RBI's measures came after high-level meetings yesterday between the Prime Minister and the Finance Minister, followed by discussions with Governor D Subbarao.