RBI – Government ‘Jugalbandi’ to Bolster the Rupee

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.

Beginning from today the RBI will mop up Rs 22,000 Cr from the system every Monday by selling cash management bills. The reduction in the liquidity is likely to take some toll on those who are long on the dollar. This will strengthen the Rupee.

The Rupee which had closed last week at 60.88 against the U.S. Dollar is likely to begin its northern journey, where the first meaningful resistance is going to be faced at the 60 mark.

Readers would recall that in mid-July the  RBI had raised short-term borrowing rates and limited banks access to liquidity by way of restricting borrowing from the repo window just 50% of their entitlement. It had also asked banks to maintain the 99% of the CRR on a daily basis.

The steps of the RBI are likely to be complemented by a series of moves by the Government. The FM could announce the series of steps it intends taking in the Parliament today itself.

The approach is likely to be multi-pronged.

The aim is to build the confidence of the markets in the Rupee.

This will have to happen through a series of steps

1.   Tell the markets that it will not leave the rupee to fend for itself

2.   That it will do whatever it takes defend the Rupee

3.   Confidence will come and the Rupee will move north if the

A.   If the import duty on non-essential imports is hiked to the extent that it reduces consumption. Why should some on buying a fancy phone get the Dollar at the same rate as someone importing a lifesaving gadget?

So Expect Import duty hikes on Alcohol, Electronic items, Gold and even Toys and Fruits

B.   The War Chest of foreign currency is bolstered.

So expect steps that will encourage foreigners to invest in REITS, relax the ECB norms, raising FCNR deposit rates and coaxing public sector entities to issue bonds.

At the end of the day, the markets want to see credible steps being taken. And the Government should then walk its talk.

The Rupee is likely to appreciate in the morning itself in expectations of an announcement by the Government. The Rupee could then support the markets. But private sector banks, which are dependent on short term borrowing, are likely to move further south as they will be forced to cough up higher interest rates.