India’s rupee rose marginally against the US dollar yesterday after the central bank hiked short-term interest rates to shore up the beleaguered currency and reduce speculation.
The partially convertible Indian currency gained in opening trade to touch 59.42 to the greenback at 5:15am GMT, from a previous close of 59.85.
The Reserve Bank of India (RBI) announced on Monday night that it was raising the marginal standing rate used to lend to commercial banks when there is a shortage of funds in the market. It also raised the bank rate at which it lends to commercial banks in a sign that deposit rates should be increased.
The central bank warned in a statement it would “continue to closely monitor” financial markets “and will take such other measures as may be necessary” to ensure “macroeconomic stability.”
Indian shares, particularly banks and financial institutions, slid 1.22 percent to 19,790.78 points yesterday morning.
Analysts said bond yields also rose in early trade yesterday, which may encourage inflows into the country.
“The rupee will appreciate further from here,” NSP Forex chief executive Param Sarma said yesterday, expecting levels of 58.50 by next week.
The rupee has been the worst-performing major Asian currency this financial year, dropping to a record low of 61.20 to the US dollar last week. The fall is attributed to expectations of a rollback in US monetary stimulus that has spurred investor flows from emerging markets, combined with a sharply slowing domestic economy.
Abhishek Goenka, chief executive of consultancy firm IndiaForex, called the reserve bank’s moves “positive for the rupee in the short-term.”
“The RBI and the finance ministry are getting active to announce measures to help boost the rupee,” he said.
The announcement of the bank’s measures came after talks between Indian Prime Minister Manmohan Singh and Indian Finance Minister P. Chidambaram, and monetary authorities.
Both the marginal standing rate and the bank rate were increased by a hefty two percentages points to 10.25 percent from 8.25 percent.
However, the central bank left unchanged at 7.25 percent its benchmark repurchase rate at which it lends to commercial banks against securities.
The rate hikes are aimed at making it more attractive for investors to hold the rupee, but will disappoint business which has been clamoring for lower rates to boost economic activity by making borrowing costs cheaper.
India’s economy grew at 5 percent last year, the slowest pace in a decade, and recent gloomy economic numbers point to further economic weakness this year.
The bank’s move came on the heels of other steps taken by authorities last week to curb speculative trading in the currency after it hit a lifetime low of 61.21 rupees to the US dollar early last week.
In addition, the government plans to sell 120 billion rupees (US$2 billion) of government bonds that will syphon cash from the economy and make funds scarcer.