"The steps taken so far are perceived as insufficient and more assertive measures need to be taken to decisively stem the currency slide," says JP Morgan's outlook on Indian markets.
The rupee has depreciated around five per cent from the beginning of the current financial year. The fall was primarily on account of the growth in oil imports at 86 per cent in the first quarter of 2000-01.
However, non-oil imports also recorded a 14 per cent growth, higher than the three per cent growth witnessed in the first quarter of the last fiscal.
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Besides conducting repo auctions at a cut-off rate of more than 14 per cent, RBI on July 21 has hiked the bank rate and cash reserve requirements of banks by 100 and 50 basis points, respectively , and halved the refinance limits of banks as measures to strengthen the rupee.
These steps were followed by the directives issued by the apex bank to the exporters to convert 50 per cent of their EEFC balances to the Indian currency.
The institution said that the liquidity-tightening measures, in addition to the volatility in the forex market, have affected the sentiment in the government securities market.
Other factors responsible for the hardening of interest rates, according to JP Morgan, are the large borrowing plan of the Centre, relatively higher inflation, hardening crude prices and rising oil pool deficit.
J P Morgan said that the investments will be concentrated in the shorter end of the securities market as capital inflow is likely to be low during the rest part of the current fiscal. "Interest rates are certainly not expected to decline over the rest of the year and market participants are better off staying invested in near cash assets," pointed out the report.
Higher interest rates are likely to increase the monetisation of government debt -- which is already high in the current fiscal -- if the RBI does not rise the interest rates or shorten the maturity of government securities, the report said.