Rupee gains as RBI hikes short-term rates

The rupee showed signs that it could still recover from the pits with the Indian currency gaining over 1 per cent in early trading today after the Reserve Bank of India (RBI) hiked short-term interest rates late on Monday.

The rupee was trading at 59.22 at the start of the session at 09.05 am on Tuesday against Monday's close of 59.89 / 90 per dollar.

The RBI increased banks' cost of borrowing short-term money through recalibrating the marginal standing facility (MSF) rate under the Liquidity Adjustment Facility (LAF) by 300 basis points above the policy repo rate and the Bank Rate by 200 basis points to 10.25 per cent each.

These measures have made short-term borrowing costlier for banks to fund purchase of dollars in the forward markets, thereby reducing the pressure on the rupee.

The RBI also capped the amount banks can borrow from overnight markets to Rs75,000 crore. The allocation to individual banks will be made in proportion to their bids, subject to the overall ceiling.

This change in LAF will come into effect from 17 July 2013, RBI said.

RBI will also conduct open market sales of government of India securities of Rs12,000 crore on 18 July 2013.

Higher yields on the rupee bonds will attract foreign investors in the debt market after FIIs sold billions of dollars in the debt market.

Net portfolio investments of FIIs in India slumped to just $50 million in the three months to June from $11.3 billion in the quarter ended in April.

RBI announced these measures to suck liquidity from the system and tighten banks' liquidity after governor D Subbarao met finance minister P Chidambaram yesterday.

These measures will prevent banks from taking speculative position in forward markets over the short term.