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RBI's aid-rupee measures help markets make remarkable recovery

In a smart turnaround, the Indian rupee today staged a smart recovery by 16 per cent against the US dollar in local foreign exchange market mainly on the support given by the Reserve Bank of India through the announcement of stringent short-term meassures early this afternoon and also modest intervention in the market.

The RBI measures also had a knee-jerk impact on the capital market as the prices of pivotals gained. The Bombay Stock Exchange Sensitive Index shot up by 105 points to 2989.60 points. The call money rate remained as high as at 9.50-10 per cent.

The stock markets were dominated by the rupee's gain, firm Global Depository Receipts market and positive political developments coupled with heavy short covering by market players in the index-based scrips resulting in a smart rally.

In a decisive action, the RBI has pumped out Rs 50 billion from the forex market by hiking the cash reserve ratio by one percentage point to 11 per cent effective from August 29. The RBI also increased the repo rate by three percentage points to 8 per cent, indicating an overall hardening of short-term interest rates in the economy.

While the measures were temporary in nature, sources at the RBI said that there were excessive speculative activities in the market and this could now be confirmed with substantial recovery of Indian rupee in a single trading day.

The forward premia also rose sharply reacting to the RBI's decision to hike repo rate and CRR.

The three-month premia shot up to 14.30 per cent from yesterday's level of 9.23 per cent. Similarly, the six- months premia closed higher at 12.43 from 9.08 and the yearly premia at 11.55 from 9.49 per cent.

According to leading analysts in Bombay, the RBI measures are mainly for short-term benefits and are not going to help the Indian currency for a long-term prospective.

Without resorting to day-to-day intervention in the market in support of the rupee, the RBI found it more convenient (like the steps it had taken in January this year) to wipe out liquidity from the system by increasing CRR level. This may ease the pressure on rupee but in longer range, the Indian currency would have to match the depressed currency environment in other Asian nations.

According to merchant banking firm J P Morgan, the Indian rupee would be touching a level of Rs 45.50 against a dollar in the next six months from now, notwithstanding the fact that the country would be richer by another $ 3 billion in the next couple of weeks through the collections of Resurgent India Bonds.

While the rupee might be insulated from the wide fluctuations in other Asian markets, poor export performance, increasing trade and current account deficit would keep the rupee under pressure, said Amit Agarwal from J P Morgan. The sentiment on the rupee continued to be bearish though the next couple of fortnights might temporarily ease the pressure on the rupee solely on the strength of RIB-related flows, he added.

ICICI Securities and Finance Company's M R Madhavan said that uncertainties on the forex front would persist in the context of the Asian recession which is spreading by the day. With the collection of about $ 3.10 billion from the RIBs, the RBI ensured that excess liquidity did not remain in the system particularly because interest rate management had been quite successful till now.

While the central bank measures tightened the liquidity situation to some extent, the RBI would get back to the act of completing the borrowing programme in right earnest and would try to complete it over the next four months, he said.

UNI