Financial markets cool down on RBI moves

The Reserve Bank of India’s (RBI) intervention on Tuesday evening showed its impact on money and foreign exchange markets today.

For starters, the rupee’s six-session slide against the US dollar ended following RBI’s statement that it will continue to intervene in the market.

As a result, the Indian currency opened 46.36 to a dollar, compared with yesterday’s close of 46.93. It turned slightly weak during the trading session to touch a low of 46.72, but reversed the trend to close at 46.37, or 1.2 per cent, higher than the previous close.

Similarly, call rates eased from over 16 per cent to around 10 per cent after the central bank last evening relaxed the statutory liquidity requirement (SLR) from 25 per cent to 24 per cent for banks facing a cash crunch. The temporary measure to infuse liquidity meant that the sentiment was positive.

 

Many banks are reported to have used the relaxation for meeting the liquidity needs, when there is a large outgo on account of the second installment of advance tax payment as also the bond auctions.

The tight liquidity condition saw banks use the liquidity adjustment facility to borrow around Rs 59,000 crore from the central bank, as against over Rs 57,000 crore yesterday. “I see liquidity remaining tight for two weeks or so,” said Axis Bank Treasury Head Partha Mukherjee.

The yields in the government securities market hardened in the backdrop of profit-booking by market participants. The yields also hardened tracking the US Federal Reserve’s decision to keep the Fed Funds rate unchanged. The market was expecting an interest rate cut. The benchmark 10-year paper 8.24 per cent 2018 closed at Rs 100.30, implying an yield of 8.19 per cent.

While the sentiment on the rupee turned positive, the underlying demand from importers, especially oil marketing companies, remains strong. Treasury heads expect the rupee to stay around these levels for a while and are not ruling out the possibility of the Indian currency touching 47-mark against the dollar before starting to appreciate.

In a report, Citigroup said it expects the measures by RBI to add to dollar inflows and sees rupee trading in the 45.00-47.00 region in the near term. “Over a longer term horizon, we maintain our rupee appreciation view and expect the unit to trace back to 43.00-44.00 levels by March 2009,” it said in a research report. Last evening, taking note of the extreme volatility in financial markets, RBI also raised the ceiling on the interest rates that the banks can offer on foreign currency non-resident (Banks) or FCNR (B) and non-resident (external) rupee account or NR (E) RA deposits.