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India Adds to Cash-Supply Curbs as Rupee Volatility Climbs

India Adds to Cash-Supply Curbs as Rupee Volatility at ’09 High
The Reserve Bank of India in July capped lenders’ borrowing through daily repurchase auctions and tightened daily cash reserve ratio requirements. Photographer: Kuni Takahashi/Bloomberg

India plans to sell 220 billion rupees ($3.6 billion) of cash management bills each week, stepping up efforts to stem the rupee’s unprecedented plunge by curbing supply of the currency.

The Reserve Bank of India will auction the notes every Monday, it said in an e-mailed statement yesterday. The step follows a review of the impact of earlier measures to steady the currency and is for “effective liquidity management,” it said. The rupee strengthened in offshore trading late yesterday and Indian stock-index futures climbed in Singapore today.

The Indian currency fell to an all-time low of 61.8050 per dollar on Aug. 6 and three-month historical volatility rose to 11.94 percent yesterday, the highest level since 2009, even after the monetary authority last month restricted banks’ access to cash, curbed trading in currency derivatives and raised two interest rates. The rupee has slumped 12 percent against the dollar in the past six months.

“Such measures are not enough,” Priyanka Kishore, a strategist at Standard Chartered Plc in London, wrote in a research note. The “market is awaiting a comprehensive package” for reducing the current-account deficit by the end of the week and if those expectations are not met, the pressure on the rupee may persist, she wrote.

First Auctions

One-month non-deliverable forwards for the rupee rose as much as 0.5 percent to a one-week high of 61.10 per dollar in offshore trading, according to prices compiled by Bloomberg. SGX CNX Nifty Index futures for August delivery increased 0.1 percent at 9:32 a.m. in Singapore. India’s markets are closed for a holiday.

The sale of cash management bills, which typically mature within 91 days, is in addition to about 150 billion rupees of bonds auctioned each Friday as part of the government’s budgeted borrowing program. The Finance Ministry also issues about 120 billion rupees of treasury bills, which mature in at least 91 days, every Wednesday.

The central bank will sell 35-day and 34-day cash management bills worth 220 billion rupees in two separate auctions on Aug. 12 and Aug. 13, it said yesterday.

The RBI in July capped lenders’ borrowing through daily repurchase auctions and tightened daily cash-reserve-ratio requirements. It also asked foreign investors to prove they aren’t speculating on the currency and barred banks from proprietary trading in currency futures and exchange-traded options. The Securities and Exchange Board of India raised margin requirements and limited open positions in such contracts.

Raghuram Rajan, who has been named as the next governor of the Reserve Bank of India, will join the central bank as an officer on special duty three weeks prior to taking over to provide an overlap with the incumbent Duvvuri Subbarao, the central bank said in a separate statement Aug. 8.

Rajan is due to take over as the governor from Sept. 5.

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