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RBI raises CRR to save rupee

Reserve Bank of India Governor Bimal Jalan today came out strongly against the foreign exchange dealers for their indulgence in excessive speculative activities in the market which may compel the Reserve Bank of India to take further stern actions, including punitive measures against the speculators.

Addressing a late evening press conference in Bombay today, Dr Jalan said that a section of corporate operators and dealers have taken advantage of the recently introduced forward-contract facilities and indulged in speculative profit-making by cancelling contracts and rebooking further in anticipation of a further lowering of the Indian rupee.

Such one-way activity has dampened the market sentiment in spite of the strong economic fundamentals, he said.

The governor statement came at a time when the rupee is poised to hit a rock-bottom of Rs 40 a dollar. Today, the currency opened at Rs 39.30-40 and hit the bottom of 39.92, just before the RBI's announcement of a package of measures, which include temporary suspension of forward contracts based on declaration, hike in cash reserve ration by 0.5 per cent to 10 per cent, removal of incremental CRR on non-resident rupee deposit and increase repos for the December 3 auction. This helped the rupee close higher at Rs 39.28-30.

Dr Jalan, who did not spell out any logical value of the rupee against the dollar, said that the speculative activity was mainly derived from excessive low-cost liquidity in the market coupled with non-alignment of short-term interest rate with the medium- and long-term rates.

Today's RBI measure were aimed at mopping up excess liquidity, that is finding its way into the forex market for speculation, and forcing a certain alignment between the short-term and long-term interests.

According to RBI findings, some corporate were indulging in heavy profit-booking by selling and buying forward premium contract without any document evidencing exposure.

Said Jalan, "We want to give freedom to the market players through liberal policy measures, but that should not be at the cost of national economic goals."

He said the RBI expects forex dealers, corporates and banks to behave in an orderly and responsive manner for the benefit of the overall economy. It is in this context that the RBI's market intervention strategy would continue to stabiles the market from the temporary nervousness and meet the genuine requirement of currency of the operators.

Dr Jalan said he did not see any fundamental weakness in the economy that could affect the rupee's value so drastically. He wondered what had happened over the past 15 days, particularly when the inflation rate and current account deficit remains unchanged at the lower level with robust forex reserve of US dollar 25 billion.

In its tough measures, the RBI has hiked the cash reserve ratio on net and time liabilities of scheduled banks to 10 per cent and also deferred reductions in CRR as announced in the busy season credit policy in October 1997.

The increase in CRR will be effective from the fortnight beginning December 6, 1997.

The other measures announced include removal of the 10 per cent incremental CRR on non-resident rupee deposits under the non-resident (external) rupee and non-resident non-repatriable rupee schemes, increase in the interest rates on fixed rate repos to be held on December 3 to five per cent from 4.50 per cent, and suspension of facility provided to authorised dealers (AD) in April 1997 to offer forward contracts based on past performance and declaration of exposures.

The RBI has stated that these measures are temporary and will be kept under review.

Henceforth, banks will allow forward contracts based on documents evidencing exposure. This implies that an authorised dealer can book a forward contract for a client only if there is an underlying trade transaction.

Meanwhile, sentiments in the foreign exchange markets remained choppy and volatile, though the new measures announced has helped the rupee gain some ground against the dollar in the post-midsession period.

The rupee opened at Rs 39.30-40 from the previous day's close of Rs 39.25-30. Panic covering and heavy demand weakened the Indian unit to Rs 39.090 at 1000 hours IST. The news of the new measures aided the rupee to recover to Rs 39.20-29 in the afternoon.

The increase in CRR is aimed at sucking the excess liquidity of rupee funds with the banks which some of them are to utilising to arbitrage, taking advantage imperfections in call money interest rates and the volatile forex markets.

Earlier, the RBI, in a statement today, reiterated that the fundamentals of the Indian economy -- economic growth, current account deficit, short-term debt to reserves ratio, and inflation -- continue to be positive and strong.

"The net capital inflows are expected to exceed the projected current account deficit, which in any case is quite low," the statement said.

In the interbank foreign exchange market, the rupee plunged to a another new low of Rs 39.82-92 in the pre-mid trading session today, but recovered soon after the RBI announced its measures.

The rupee opened at Rs 39.30-35 and heavy demand for the dollar from corporates and hectic client covering by banks pushed it down to Rs 39.82-92 at 1130 hours IST. The news of the RBI package helped the rupee gain ground to Rs 39.10-20. However, some import covering made it drift lower to Rs 39.20-30. Eventually, the rupee closed at Rs 39.28-31.

According to dealers, certain foreign banks were active in early trading, while some private banks sold the dollar heavily soon after the policy measures were announced.

"Today's trading was more mature and the spreads were respectable," a dealer remarked.

Cash spot closed at 0.50-1 paisa premium, cash tom at 0.25-0.50 paisa and tom spot at 0.25-0.50 paisa.

The forward section opened lower but firmed up by 5-10 paise following the news regarding the policy measures. The monthly forwards (in paise) ended at 20-24 for December, 50-53 for January, 70-73 for February, 96-99 for March, 118-121 for April, 138-141 for May and 157-160 for June. The six-month annualised premia closed at 7.40 per cent.

With today's fall, the rupee has lost more than a tenth of its value. The rupee ruled at Rs 35.70 in mid-August, but has been on a southward journey after the RBI Deputy Governor Dr Y V Reddy's statement that the Indian unit is overvalued by 14 per cent.

Prime Minister I K Gujral's reported statement suggesting a band within which the Indian unit should move also contributed to the downtrend.

The pound sterling opened at Rs 66.50 against the rupee and drifted lower to Rs 67.15 in early trading. The British currency closed at Rs 66.18.

"The rupee ended higher against the pound in concurrence of the rupee-dollar exchange rate correction," a dealer of a foreign bank said.

Overseas trading was quiet with negligible movement in major currencies. Back home, the yen closed at Rs 30.60 (per 100 yen) and mark at Rs 22.16.

The RBI fixed the reference rate at Rs 39.52 per US dollar.

UNI