Money market participants on Tuesday asked for a relaxation in the foreign exchange norms imposed by the Reserve Bank of India (RBI) in the wake of the sharp rupee depreciation. They also sought cuts in key interest rates and banks' cash reserve ratio (CRR), in the customary meeting prior to the monetary policy review held by the central bank.
Participants made a case for a gradual withdrawal of restrictions on forex derivative transactions. "The actions taken by RBI have shown some effects and volatility has reduced as compared to what was seen earlier," said a senior banker who attended.
In the past six months, the central bank had levied a number of restrictions in forwards, as well as currency futures transactions, to curb speculative trading. These measures include imposing limits on banks' net overnight open positions, disallowing cancelling and re-booking of forward contracts, and restricting cross-settlements of over-the-counter deals on exchanges and vice versa.
| A TIMELINE OF RBI ACTIONS ON RUPEE |
| May 21, 2012 |
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| May 21, 2012 |
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| December 15, 2011 |
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RBI has also intervened heavily in the spot foreign exchange market to stem a downward trend in the rupee. It sold $20 billion in the spot foreign exchange market between September 2011 and May 2012. Last month, the rupee fell to a record low of 57.33 against the dollar but has appreciated since then. On Tuesday, it closed at 55.11 per dollar. The rupee has depreciated by 25 per cent against the greenback since August 2011. RBI Governor D Subbarao recently said the rupee depreciation was due to global as well as domestic factors.
Market participants also asked for further monetary easing, though discussions were limited in the backdrop of now-adequate liquidity conditions. "Some asked for reduction in CRR and the policy rate, to support growth," said another treasury official. A section of the market felt the central bank must maintain status quo, since the risk of a rebound in inflation was still high, the official added.
Markets had factored in a rate cut on account of lower inflation numbers. Bond yields had fallen by around 10 basis points, as inflation eased from 7.55 per cent in May to 7.25 per cent in June. However, yields hardened back to 8.15 per cent levels when the RBI governor indicated that inflation was still above the central bank's comfort zone and short-term growth had to be sacrificed for long term benefits.
In April, the central bank had unexpectedly cut the policy rate by 50bps. In the mid-quarter review held in June, it had kept rates unchanged, citing upside risks to inflation. RBI is scheduled to announce the first quarter review of monetary policy on July 31. Today, the central bank consulted representatives from bond as well as foreign exchange markets.