Rupee gains modestly on new RBI steps

MUMBAI (Reuters) - The rupee gained modestly on Monday after another salvo from the Reserve Bank of India (RBI) to support it by tightening the money supply, but it is seen stuck near record lows unless there are genuine efforts to cut the current account deficit.

The RBI will auction 110 billion rupees in cash management bills on Monday, part of its new plan to auction a total of 220 billion rupees of bills every week to drain funds from money markets.

The idea is if the supply of rupees tightens it will create demand for the currency, which fell to a record low of 61.80 per dollar last week. That would also buy some time for the government to try to address some long-term pressures.

Expectations are high that Finance Minister P. Chidambaram will announce measures to draw in foreign inflows as early as Monday, geared towards narrowing a record current account deficit that is the key source of pressure on the rupee.

The steps could include raising money from Indians abroad, easing overseas borrowing rules for companies, or spurring state-run companies and lenders to raise money overseas.

"It takes two to tango," said Jyotheesh Kumar, an executive vice president at HDFC Securities in a note to clients.

"Both the Reserve Bank of India and the government of India are likely to act in tandem this week to shore up the ailing rupee," he added.

Trade, industrial output and consumer prices data are due on Monday as well, and are expected to reinforce concerns about growth running at its weakest in a decade at a time of high inflation.

BOND YIELDS RISE

The partially convertible rupee rose to as much as 60.45 per dollar on Monday compared to its close of 60.88/89 on Thursday, although it was last trading at 60.72.

Financial markets were closed on Friday for a holiday.

The modest gains follow the RBI's announcement of the sales of cash management bills after the market close on Thursday -- its third set of measures over the past month which have also included raising short-term interest rates.

But investors want India to tackle longer-term fiscal and economic reforms, such as raising fuel prices, and are yet to be convinced that the central bank's strategy is sustainable, raising the prospect of higher borrowing costs in the near term.

The benchmark 10-year bond yield was up 8 basis points to 8.20 percent on Monday, and is up about 70 basis points since the RBI's first round of action on July 15.

Bringing in foreign flows will be key to stabilising market confidence in the near term, analysts said.

India has traditionally restricted foreign-currency borrowings to prevent a build-up in foreign-exchange liabilities, and a more relaxed approach may trigger a dramatic spike in overseas bond offerings.

($1 = 60.8650 rupees)

(Reporting by Rafael Nam; Additonal reporting by Swati Bhat and Subhadip Sircar; Editing by John Mair)