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Rupee will fall again once shock of RBI measures wears off

The monetary measures announced by the Reserve Bank of India would be able to control the slide in the value of the rupee temporarily. Once the shock treatment wears off, however, the Indian currency is expected to head downwards in a few months.

The outflow from the banking system as a result of the hike in the cash reserve ratio is estimated at Rs 63 billion. This would effectively neutralise the expected inflow of foreign currency next month on account of the Resurgent India Bonds, according to ICICI Securities and Finance Company Limited.

The measures are also likely to result in call money rates touching low double digits next week, with the new repo rate of eight per cent acting as the floor. Also, banks would utilise the general refinance facility to the tune of Rs 8 billion, which may put an upward pressure on call rates.

Bond prices would continue to be on a southward path, as banks liquidate some positions over the next week. Bargain purchases are likely to be available, especially at the short end.

I-Sec feels the next fortnight would be ideal to build positions for the next three months in the government securities market, as banks are likely to offload their gilt stock in the form of a ''distress sale''.

The RBI on Thursday had announced a one percentage hike to 11 per cent in the CRR and a three per cent increase to eight per cent in the repo rate to suck out the excess liquidity out of the monetary system. The apex bank disallowed rebooking cancelled contracts for imports and urged exporters to expedite repatriation of proceeds with a view to checking speculation.

The market reacted in accordance to RBI's expectations. The rupee gained smartly touching a high of 42.70 from the morning levels of 43.68. Bond prices collapsed with the currently most liquid 11.55 per cent 2001 security trading at Rs 99. Call money rates firmed up slightly closing at 9.50-10 per cent.

Taking a cue from the previous experiences, I-Sec says the rupee appreciation will be a temporary reaction, since the prospect on the export front and capital inflows is not very optimistic.

The last time the RBI produced measures to counter the speculative attack on the rupee was in January 1998. Then, the apex bank hiked the CRR by 50 basis points to 10.5 per cent, bank rate by two percentage point to 11 per cent, repo rate by two per cent to 9 per cent besides reducing the general refinance facility from one per cent to 0.25 per cent.

The rupee had cooled for a short while before resuming its southward course. Call money rates climbed to over 100 per cent but later averaged 50 per cent in a fortnight and bond prices too took a knocking.

I-Sec says the only redeeming factor this time round is that banks have been given a week to brace the new reserve requirements. The new CRR comes into effect from August 29.

The liquidity position is likely to improve over the next quarter as the banks are recording strong deposit growth and large inflows on account of redemptions (Rs 72 billion from dated gilts and 364 day T-bills) and coupons of over Rs 100 billion due till end of 1998.

UNI