In order to contain the depreciation of rupee against the dollar, the Reserve Bank of India (RBI) raised the cost of borrowing under the marginal standing facility by 200 basis points.
Further, the central bank restricted the amount of money that banks can borrow from its LAF window to just 1 per cent of deposits at Rs 75,000 crore citing the need to "restore stability to the foreign exchange market.
These measures will force banks to seek funds from markets and offer higher rates for depositors. As a result, interest rates on short-term borrowings, commercial papers, deposit rates and loans rates may go up 25-50 basis points in the next few weeks.
The central bank took the above measures as its earlier steps to defend the sliding currency have so far not borne fruits. The central bank raised the cost of funds to make debt securities attractive for global investors who are being lured by rising bond yields in the US amid talk of bond purchases tapering.
But some reports indicate that the impact of the RBI move, which came late Monday evening, may be muted in changing the direction of the currency even though there could be a short-term rally.
Rupee depreciated beyond 60 a dollar in recent trading session as foreign investors withdrew their investment in India, especially in debt instruments.
Foreign investors reduced their ownership of rupee-denominated bonds by $99.5 million to $30.26 billion on July 11, official data suggests.