RBI attempt to stem Re fall may hurt growth

Measures not to be seen as prelude to rate cut: FM

RBI attempt to stem Re fall may hurt growth

Strong measures by the Reserve Bank of India (RBI) to support the falling rupee arrested the currency slide only marginally, but raised fears that restricting availability of  funds with banks may harden interest rates and impact overall economic growth.

 The RBI’s measures, which included raising cost of borrowing for banks by 2 per cent to 10.25 per cent and sale of bonds worth Rs 12,000 crore on July 18 through open market operations, are expected to provide stability to the rupee, comes after the Indian currency touched an all-time low of 61.21 to a dollar.

The measures taken will indirectly increase borrowing costs of banks and restrict access to easy money in order to prevent speculation in the currency market but it is also seen by analysts as an indirect rate hike.

Analysts feared the losses in stock and bond markets could reverse the direction of flow to other markets. Overseas investors have already sold around $11 billion worth of debt and stocks since May 21 after the US Federal Reserve hinted at Tightening of Quantitative Easing or the $85 billion bond buying programme by the US government by the end of the year.

The move saw brokerages cutting India’s GDP forecast for fiscal 2014 and banks warning that the measures to tackle rupee volatility is likely to provide only some short- term relief. Bank of America-Merrill Lynch cut its GDP forecast for 5.5 per cent from 5.8 per cent earlier.

 Finance Minister Chidambaram, however, said the RBI’s measures should not be seen as a prelude to change in policy rates. He also said that the measures were intended to quell speculation or excessive speculation in the forex market.

Though RBI measures witnessed 1 per cent jump in the currency on Tuesday, analysts feared that this may be a temporary halt and stability in the currency can come in only if the fundamentals of the economy start becoming sound.

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