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As the rupee hit a fresh low of 61.49 against a dollar in the early trade today, the finance ministry and the Reserve Bank of India (RBI) will discuss possible measures to manage the situation.
The sub-committee of Financial Stability Development Council (FSDC) will meet in Mumbai tomorrow to assess the impact of liquidity tightening steps taken by the central bank in the last few weeks. The meet will discuss further measures to arrest fall of the rupee.
“We will meet shortly to discuss the current macro-economic situation and depreciation in the rupee. We will discuss what more measures can be taken to address the problem,” a finance ministry official, who did not wish to be identified, told Business Standard.
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The rupee has depreciated 12.15% against the dollar this fiscal due to both local and global factors. To make the rupee expensive, the central bank had hiked the marginal standing facility (MSF) rate by 200 bps to 10.25% while capping banks' borrowing from the liquidity adjustment facility. Despite measures taken by the RBI, the currency has weakened further.
According to market participants, RBI may lower the cap for bank’s borrowing under LAF further. A temporary hike in the cash reserve ratio could be another option. Cash reserve ratio is the proportion of deposits that banks need to park with RBI as cash.
The central bank is yet to use any monetary policy tool for tackling the exchange rate but RBI governor D Subbarao has indicated that if the long term rates increase as a result of the measures, then that is inevitable and part of the process.
Among other steps that could be contemplated by RBI are revising the export credit refinance rate and selling short term securities. Bank’s borrowing from the MSF facility has increased by about Rs 27,000 crore since the July 15 liquidity measures. Banks avail these funds at the repo rate which is currently at 7.25%. This rate could be aligned with the MSF rate. Generally, MSF rate has a mark up of a 100 basis points over the repo rate. However, now it has risen to 300 basis points.
