M A I N   N E W S

RBI booster to Re spooks market
Sanjeev Sharma/TNS

New Delhi, July 16
The central bank’s strong defence of the faltering rupee provided some strength to the currency but in the process had a collateral damage as it spooked stock markets and brokerages downgraded growth estimates of the economy on concerns that interest rates would harden and money would become costlier.

The Reserve Bank of India (RBI) had yesterday launched its most concerted attack to shore up the rupee which had some days back crossed the 61 to the dollar mark by tightening liquidity and effectively raising interest rates for borrowings by banks.

The RBI’s measures shored up the rupee by 58 paisa to end at 59.31 against the dollar, the biggest gain in more than a fortnight. However, it had the reverse effect on the stock markets which reacted adversely to fears of interest rates going up and fell by 183 points with the financials taking a pounding.

Allaying concerns over the interest rate stance, Finance Minister P Chidambaram today said the last night’s measures by the Reserve Bank of India have nothing to do with the upcoming monetary policy review and may not impact interest rates of banks. RBI’s measures, he said, were aimed at checking excessive volatility and speculation in the forex market. However, now there are mounting concerns over the growth pace of the economy. The Asian Development Bank (ADB) today downgraded India’s growth target to 5.8 per cent in the 2013 calendar year from the 6 per cent projected earlier.

“In India, slowing fixed capital formation, weak industrial activity, and plodding progress on reform are weighing on the economy”, ADB said.

Brokerages have pointed out that the RBI steps will pull down growth in the economy. Morgan Stanley said the RBI chose to defend the currency by quantitative tightening (reducing rupee supply), and this may take its toll on the equity and bond markets.

“It increases the downside risks to growth, raises the cost of money and dampens domestic liquidity”, it said.

Bank of America Merrill Lynch cut its growth estimates for financial year 2014 to 5.5 per cent from 5.8 per cent. “We expect today’s measures to push back softening of interest rates. We have cut our FY14 growth forecast to 5.5% from 5.8% earlier as RBI’s tightening will push back lending rate cuts. In particular, we have cut manufacturing growth by 100 bais points to 2 per cent. We had earlier expected growth to stage a shallow recovery on the back of better rains and lending rate cuts. We have now removed the 30 basis points we had expected from softer rates”, it said in a note.

Impressive gain

• The RBI’s measures shored up the rupee by 58 paisa to end at 59.31 against the dollar.
• This is the biggest gain in more than a fortnight.

Markets down

• However, it had the reverse effect on the stock markets which reacted adversely to fears of interest rates going up
• It fell by 183 points with the financials taking a pounding.

FM allays concerns

• Finance Minister P Chidambaram said the measures by the RBI have nothing to do with the upcoming monetary policy review.
• It may not impact interest rates of banks.
• The steps were aimed at checking excessive volatility and speculation in the forex market.