India unveils new steps to drain cash to support rupee

MUMBAI Thu Aug 8, 2013 7:16pm IST

The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai July 30, 2013. REUTERS/Vivek Prakash

The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai July 30, 2013.

Credit: Reuters/Vivek Prakash

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MUMBAI (Reuters) - The Reserve Bank of India (RBI) announced new measures on Thursday to drain cash from the financial system in a bid to address volatility in currency markets, after a slew of steps announced last month failed to prop up the battered rupee.

The RBI will auction 220 billion rupees of government cash management bills every Monday, it said in a statement, without specifying for how many weeks the sales would last.

The measures come after the RBI unveiled measures on July 15, including raising short-term interest rates, in a bid to drain cash from the financial system, and followed up with additional steps on July 23.

However, those steps failed to prop up the rupee, which has fallen 1.6 percent since the initial measures were announced mid-month and hit a record low of 61.80 on Tuesday.

The latest additional cash-draining steps were announced amid investor expectations for government measures to attract foreign inflows in a bid to help narrow a record high current account deficit, which has been the key source of stress on the rupee.

Expectations a package will be announced over the weekend pushed the rupee on Thursday to its biggest single-day gain in two weeks.

It closed at 60.88/89 per dollar, compared with 61.30/31 on Wednesday.

"There was some hope in the market that the previous measures would be reversed in some time and that is why there was a rally in the bond market. But today's measures signal that there is still some more time to go before any reversal," said Ashish Parthasarthy, head treasurer at HDFC Bank.

"It is difficult to say whether this will have an impact on the rupee or not. There is a general expectation in the market that the rupee has depreciated a lot and the probability of the rupee falling sharply from here is less than before."

The RBI's measures have raised concerns about their impact on India's economy which is growing at 5 percent, its slowest pace in a decade.

Benchmark 10-year bond yields have surged 57 basis points since the measures were announced, but have come down from a peak of 8.50 percent on July 24 to end trade at 8.12 percent on Thursday.

Traders said they expect the new measures to push up bond yields on Monday. Friday is a public holiday in India.

The RBI said on Thursday that details of each cash management bill sale will be announced a day before the auction. Detailed guidelines will be issued separately, the RBI said.

Expected government measures to attract foreign inflows to ease the current account gap could include raising money from Indians abroad and spurring state-run companies and banks to raise debt abroad. government officials, including Finance Minister P. Chidambaram, have said.

(Writing by Rafael Nam; Editing by Susan Fenton)

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