RBI finally supports rupee

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Hyderabad: In a surprise move to arrest the plunge of the rupee, the Reserve Bank of India on Monday announced strong measures to reduce liquidity in the banking system to prevent speculation in the currency market.
These moves, analysts said, could lead to a subsequent increase over the long term in lending rates for home, auto and consumer loans due to tighter liquidity. The measures include setting a daily borrowing limit for banks, and a two per cent increase in the Marginal Standing Facility rate that is charged for the money that banks borrow from the RBI for emergencies.
The RBI also hiked its bank rate, which is at the same level as the MSF, from 8.25 per cent to 10.25 per cent with immediate effect. The RBI will conduct sale of Government of India securities to suck up another Rs 12,000 crore on July 18 from the market, in a move to make rupee dearer.
The rupee declined 33 paise on Monday, the most in a week, to 59.89 against the dollar on fresh demand from banks and importers. The rupee had recently plunged to 61 to the dollar.The rupee losing value had affected many sectors, including those directly affecting consumers in the form of higher cost of fuel, more expensive foreign education, apart from the rising cost of holidays abroad.
The announcement came after a meeting between Prime Minister Manmohan Singh and finance minister P. Chidambaram, followed by RBI governor D. Subbarao’s discussions with the finance minister and his officials in New Delhi.
Explaining the reasons behind the move, RBI in a late night statement said, “The exchange rate pressure evidences that the demand for foreign currency (US dollar) has increased visa-vis that of the rupee in part due to the improving domestic liquidity situation.”
RBI risks slump, says analyst
Liquidity tightening measures of RBI will strengthen the rupee in the short-term at the expense of the economic growth, warn analysts.
“The RBI measures will tighten the liquidity in the market and re-establish interest rate differential between the US bond yields and Indian bond yields. Though this will streng-then the rupee in the short-term, it could lead to an increase in lending rates, which will result a further slow down in growth rate and a risk of a classic stagflation,” Jagannadham Thunuguntla, head of equities at SMC Global Securities, told this newspaper.
A senior