RBI's fresh liquidity curbs once again came to the rescue of rupee, helping it gain 63 paise to a one-month high against the dollar, while financial stocks were battered, dragging the Sensex 1 per cent down.
The rupee snapped a two-day fall, opening strong at 59.49 a dollar from the previous close of 59.76 at Interbank Foreign Exchange Market. It then touched a low of 59.59, rebounded to a high of 59.01 and closed at 59.13, gaining 63 paise or 1.05 per cent. Rupee last traded at these levels on June 19.
Showing a greater resolve to curb the volatile currency, the Reserve Bank of India yesterday evening announced more measures to squeeze liquidity from the banking system. It limited access to borrowed funds by cutting the liquidity adjustment facility for each bank to 0.5 per cent of net demand and time liabilities from 1 per cent.
Banks have been asked to keep cash reserve ratio of 99 per cent of the needs daily as against 70 per cent earlier.
A week ago, the RBI had raised short term interest rates and announced sale of government securities worth Rs 12,000 crore. However, it raised only 2,532 crore from the open market sales on July 18. Effects of those steps proved to be short-lived as rupee continued to trade at 59.7 levels.
"(Today) the gains in the currency are mainly attributed to the recent measures announced by the central bank," said Abhishek Goenka, founder & CEO at India Forex Advisors. "RBI is taking every possible step to tighten the liquidity in the market and providing support to the weak rupee."
While rupee strengthened today, financial stocks led shares lower as investors fretted over surging cost of funds.
The Sensex, which had climbed to a 30-month high yesterday, started weak and fell below the 20K-mark to a low of 19,994.25. It closed at 20,090.68, a fall of 1.04 per cent. In the previous five days, it had risen 450.90 points or 2.27 per cent. Investor wealth worth Rs 78,000 crore was wiped out.
"Markets sold off sharply on the back of fresh RBI measures," said Sanjeev Zarbade, vice president - PCG Research at Kotak Securities. "Banks having higher bulk borrowing would get impacted more as bond yields, CP and CD rates are likely to rise sharply.
