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Pain balances out gain

Mumbai, July 16: The Reserve Bank of India’s boldest attempt yet to prevent a rout in the rupee delivered only a modest lift in the currency, but shares slumped and bond yields jumped as investors worried that policymakers might overplay their hand and damage economic growth.

The government today said the moves were an attempt to stabilise the currency, which hit a record low last week and is down nearly 10 per cent since the start of May, but analysts said longer-term economic reforms were really what was needed.

The rupee today rose 58 paise to end at 59.32 against the dollar, while the Sensex tumbled 183 points to finish at 19851.23.

The rupee opened higher at 59.20 per dollar against the previous close of 59.89 at the forex market and touched a high of 59.14 before ending at 59.32, a net gain of 58 paise, or 0.97 per cent. It moved in a range of 59.14 to 59.50 per dollar during the day.

The Reserve Bank had last night raised borrowing costs for banks and said it would sell bonds through open market operations to drain Rs 12,000 crore from the system.

“For the rupee, this may provide some short-term relief as it shows policy makers' resolve to limit further sharp weakness in the currency,” Dominic Bunning, FX strategist, and Paul Mackel, head of Asian currency research at HSBC, said in a report. “However, the current account deficit (CAD) and the ability to attract long-term foreign capital inflows are still major hurdles, as is external market volatility.”

Finance minister P. Chidambaram today dismissed fears that RBI’s decisions last night could lead to tightening of interest rates and added that the government was targeting a “level” for the fluctuating rupee.

“These measures are intended to quell excessive speculative activity in the foreign exchange market and to stabilise the rupee. I believe that these measures are for short term and certainly should not be interpreted as a prelude or precursor to some kind of tightening of policy rates,” he said.

He added that the steps taken would moderate inflation and contain CAD.

Meanwhile, The State Bank of India ruled out increasing its lending rates following the RBI’s move to hike short-term borrowing costs. “Neither the management nor the board of the SBI that met today here felt that this requires any adjustment in lending rates. No change in the interest rate is under consideration by the SBI,” the bank said.

Stocks cave in

Rattled by the RBI’s measures to tighten liquidity to curb rupee volatility, the Sensex today snapped a three-day winning spree and fell 183 points, dragged lower by financial sector stocks.

Bank stocks slumped on concerns that the measures would spark an interest rate increase, besides making it costlier for lenders and financial companies to raise short-term funds. Rate-sensitive auto stocks also declined.

“Apart from hurting margins through higher borrowing cost, it may impact credit growth and asset quality,” said Amar Ambani, head of research at India Infoline. “Increase in yields of long-dated government securities could spell treasury losses for some banks.”

The Sensex opened lower at 19788.09 and fell to a low of 19649.58. It recovered later to 19890.63 before ending at 19851.23, a loss of 183.25 points, or 0.91 per cent. The index had gained 740.36 points, or 3.84 per cent, in the previous three days.

The Nifty of the NSE fell 1.25 per cent to 5955.25, while the SX40 index on the MCX-SX closed 0.71 per cent lower at 11854.7.

 
 
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