JOIN USCRR cut, rupee surge leave markets cold
Following the landmark decisions on foreign direct investment (FDI) in retail and aviation sectors, the RBI on Monday made a cautious move that would pump in additional Rs 17,000 crore into the market, even as rupee has been witnessing an appreciation against the dollar since late last week.
During the day, the rupee hit a four-month high of 53.66 against the dollar in earlier trading sessions, marking its strongest level since May 15, but closed at 54.01 a dollar. The RBI action clearly cut some of the rupee's gains after renewed dollar selling by exporters and some banks following the RBI announcement.
The central bank cut by 0.25 per cent the banks’ cash reserve ratio (CRR) – the percentage of deposits banks have to mandatorily keep with the apex bank – to 4.5 per cent effective September 22, 2012, lower than industry expectations, but maintained lending rates at the same level in view of high inflation.
The repo rate (or, rate at which RBI lends to banks) will remain unchanged at 8 per cent and reverse repo – the rate at RBI absorbs excess liquidity from banks – stays at 7 per cent, and the central bank’s conservatism depressed the markets which had shown enthusiastic surge in the forenoon.
Foreign Institutional Investors (FIIs) had pumped in Rs 2,252 crore into the market in the early trading session on Monday. However, in response to RBI’s rather cautious move, the market which had gained over 250 points in the initial part of the day, lost much of its gains to close at a marginal 78 points higher, its highest closing level since July 25 last year. Investors were clearly not excited at RBI simply reducing CRR by 0.25 per cent while keeping key interest rates unchanged, market sources said.
Analysts noted that the market’s initial gains had been trimmed by the RBI decision, leading to it (the market) not able to capitalise on its initial gains.
However, with the Sensex rising for nine straight sessions – thanks in part to the FDI reforms last week, this is the index’s longest gaining trend since October 2007.
RBI Governor Duvvuri Subbarao said while announcing the CRR cuts, “As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflationary expectations.”
Bankers noted that the CRR cut would release more liquidity into the market, putting pressure on the rupee, and increasing inflationary pressures.
Abhishek Goenka, Founder & CEO, India Forex Advisors, said that the gains made by the market have been shortlived. “The trend remains bearish,” he said. However, analysts remained optimistic on the rupee's outlook. They hope that the government's big bang reforms like opening up retail and aviation sectors to FDI will spur forex inflows which will help narrow down the country's current account deficit, which hit a record $21.7 billion in the March quarter, and also provide a boost to the beleaguered rupee.
The rupee had spurted by 113 paise last Friday after the government hiked diesel prices to contain the fiscal deficit and opted for big-bang reforms to push growth. It has rallied as much as 3.2 per cent against the dollar since its Thursday close, but is still down around 12 per cent below the levels seen in September last year.
“These reform moves are necessary to help reverse the drastic FDI contraction seen thus far this year into India,” Nizam Idris and Teresa Lam, strategists at Macquarie Bank, said in a research note. Macquarie advised investors to go long on the rupee against the dollar, while HSBC raised its rupee forecast to 52 to the dollar by end-December from its earlier forecast of 57.