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India Tightens Banks’ Access to Cash to Stem Rupee Plunge

India Tightens Banks’ Access to Cash to Stem Plunge in Rupee
A Bombay Intelligence Security (BIS) stands guard beside Reserve Bank of India (RBI) signage outside the central bank's headquarters in Mumbai. Photographer: Kuni Takahashi/Bloomberg

India moved to tighten banks’ access to cash a week after it increased two interest rates, stepping up efforts to support the rupee after the currency plunged to a record low earlier this month.

The Reserve Bank of India capped banks’ access to cash under the liquidity adjustment facility to 0.5 percent of their own net demand and time liabilities beginning today, it said in a statement. The central bank also raised the daily balance requirement for the cash reserve ratio to 99 percent from 70 percent, effective July 27. It also separately announced an auction of cash management bills totaling 60 billion rupees ($1 billion) on July 25.

“The redesign and tweaking of measures in quick succession shows the RBI’s serious resolve to check rupee weakness,” said Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai. “It does not want any entrenchment of the view that rupee weakness will persist.”

The central bank on July 15 raised two interest rates, capped its daily fund injections via repo contracts and moved to drain money from the economy through bond sales, joining emerging nations from Brazil to Indonesia in tightening policy to steady currencies.

The rupee has slumped 9 percent in the past three months versus the dollar, hurt by a record current-account deficit and reduced demand for emerging-market assets. The currency, which touched an all-time low of 61.2125 on July 8, declined 0.1 percent yesterday to 59.765 per dollar.

The recent moves by Reserve Bank Governor Duvvuri Subbarao contrast with his decisions to lower the benchmark repurchase rate by 25 basis points each in January, March and May to 7.25 percent, in a bid to fight the weakest economic growth in a decade. Subbarao left the repurchase rate unchanged in June and the central bank is next set to announce policy rates July 30.

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