RBI jump in to save Rupee,Hikes Intrest Rate

Here’s what RBI has done.

1) The RBI has increased banks’ cost of borrowing short term money through the Marginal Standing Facility (MSF) rate and Bank Rate each by 200 basis points ( 2 per cent) to 10.25 per cent. The measure will make it unattractive for banks to borrow rupee (at cheap rates) and buy dollars (in the forward markets). This will reduce the pressure on the rupee.

2) The RBI has capped the amount banks can borrow from overnight markets to Rs. 75,000 crore. This is aimed to suck liquidity from the system. This will prevent banks from taking speculative position in forward markets (will support the rupee).

3) The RBI will conduct Open Market Sales of bonds of Rs. 12,000 crore on Thursday to further suck out liquidity from the system. Bond prices will fall and yields will rise. Higher yields will attract foreign investors in the debt market. FIIs have sold billions of dollars in the debt market ever since Fed Reserve Chairman Ben Bernanke signalled a tapering of the quantitative easing in the U.S. resulting in a 10 per cent drop in the value of Indian rupee. Net portfolio investments in India slumped to just $50 million in the three months to June from $11.3 billion in the quarter ending in April.

Market participants said the measures will give near-term support to the rupee.

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