RBI steps may not rein in rupee weakness: economists

Some analysts feel that the recent moves by Reserve Bank of India (RBI) to arrest rupee depreciation may not be effective.

It may be recalled that the central bank further tightened rupee liquidity by restricting the borrowing of banks under the daily liquidity adjustment facility (LAF)
to 0.5 percent of deposits from the present 1 percent.

Banks avail funds under RBI’s LAF to overcome short-term liquidity pressure.

In another step, the central bank mandated banks to maintain 99 percent of their daily cash reserve ratio requirements – the deposits they must set aside – with the RBI, as against 70 percent now.

RBI took these steps to create demand for the local currency by aggressively draining cash from money markets and sharply raising short-term interest rates.

But some economists feel that these measures may not be very effective to prevent the depreciation of rupee.
This is because there is a risk that capital inflows in the equity market may decline as these steps put more pressure on economic growth in the medium term, some economists argue said.

Some of the rupee’s fall – 12 percent since May and including a record low of 61.21 to the dollar on July 8 – reflects a broader selloff in emerging markets on signs the United States is preparing to wind down its economic stimulus.