RBI acts to tackle Re volatility

The Reserve Bank of India (RBI) on Monday announced a slew of measures to ensure stability in the foreign exchange market which on macro-level seeks to bring down the country's current account deficit (CAD).

The rupee has depreciated markedly in the last six weeks, although the market perception of likely tapering of US quantitative easing has had triggered outflows of portfolio investment, particularly from the debt segment. This indicated that the demand for dollar against rupee surged owing to improved domestic liquidity situation.

In the given situation, the RBI felt the need to restore stability to the foreign exchange market and announced measures like recalibrating the marginal standing facility (MSF) to be 300 basis points above the repo rate—the rate at which bank borrows money from the RBI for short term use—with immediate effect.

One basis point is the equivalent of one-hundredth of a per cent. Consequently, the MSF rate will now be 10.25 per cent. Also, the bank rate stands adjusted to 10.25 per cent with immediate effect.

The overall allocation of funds under the liquidity adjustment facility (LAF) will be limited to 1 per cent of the net demand and time liabilities (NDTL) of the banking system, which is estimated to be Rs 75,000 crore for this purpose, said the RBI in a statement released in the late hours of Monday.

Even as the allocation to individual banks will be made in proportion to their bids, subject to the overall ceiling, this change in the LAF will come into effect from July 17, 2013.
Further, the apex bank will conduct Open Market Sales of Government of India Securities of Rs 12,000 crore on July 18, 2013. Details of the securities included for the OMO sale auction will be announced through a separate press release on Tuesday.

Meanwhile, the rupee closed at 59.89/90 per dollar against 59.56/57 on Friday last.