India’s Central Bank Raises Two Interest Rates to Support Rupee

India’s Central Bank Raises Two Interest Rates to Support Rupee

India’s central bank raised two interest rates as part of measures to steady the nation’s currency following a plunge in the rupee to a record low.

The Reserve Bank of India increased both the marginal standing facility and the bank rate to 10.25 percent from 8.25 percent, it said in a statement on its website late yesterday. The monetary authority said it will conduct open market sales of government bonds worth 120 billion rupees ($2 billion) on June 18, a step that would drain cash from the economy.“These moves will not only push up interest rates but also lead to tightened liquidity conditions,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “It’s quite surprising that the central bank has used these measures to support the rupee at a time when the economy is in such a bad state.”

Governor Duvvuri Subbarao kept the repurchase rate, the policy benchmark, at 7.25 percent in June as the rupee’s drop stoked price pressures. That snapped a run of three cuts to fight the weakest growth in a decade. In contrast, emerging markets from Brazil to Indonesia have raised policy borrowing costs in 2013 to aid their currencies as the prospect of reduced U.S. monetary stimulus curbs demand for emerging-market assets.

The rupee, which has also been hurt by India’s record current-account deficit, has sunk 8.2 percent against the dollar in 2013. It weakened 0.4 percent to 59.895 at the close in Mumbai yesterday and touched an all-time low on July 8.

The central bank also said lenders borrowing under the liquidity adjustment facility will be limited to 1 percent of the net demand and time liabilities and that allocation to banks will be in proportion to their bids.

Rupee Liquidity

Yesterday’s “tightening moves are aimed at making the rupee liquidity dearer” and arresting the decline in the currency, said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai.

The central bank said it will “continue to closely monitor the markets, the liquidity situation and the macroeconomic developments and will take such other measures as may be necessary, consistent with the growth-inflation dynamics and macroeconomic stability.”

A report yesterday showed wholesale-price inflation accelerated to a three-month high of 4.86 percent in June. Consumer-price growth quickened toward 10 percent last month.

India’s economy expanded 5 percent in the fiscal year ended March, the slowest since 2003, hurt by moderating investment, easing domestic demand and subdued exports.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net