A runaway currency has pushed the Reserve Bank of India to make interest rates more tempting for NRIs to bring in dollars. As the rupee closed at a new low on Wednesday, RBI allowed banks to offer higher return on dollar as well rupee deposits parked by NRIs.
Banks can now give 125 basis points over London Inter-bank Offered Rate, or Libor - the benchmark rate in international money markets on foreign currency non-resident accounts against a mark-up of 100 basis points permitted till now.
On non-resident (external) or rupee deposits, the interest rate cap has been raised to 275 basis points over Libor, from 175 bps. "It will help to improve sentiment," said Parthasarathi Mukherjee, president (treasury and international Banking) at Axis Bank. The six-month Libor is at 0.71%.
Earlier in the day, the rupee fell to a low of Rs 52.37 to the dollar, but recovered to an intraday high of Rs 51.75 on suspected dollar sales by the Reserve Bank of India. But despite intervention and the central bank's move to lift the $100-m cap on banks for swap, the local currency ended at 52.37.
Such swap transactions, where corporates enter into deals with banks to swap rupee loans to dollar, banks sell dollar in spot market and buy in forward. But the market did not feel that this will help to increase dollar supply. Global stock markets plunged to a six-week low on Wednesday after China's manufacturing activity in November dropped to a 32-week low, contributing to existing worries about US economic growth and Europe's debt worries.
Tracking the weakness across markets, India's key indices hit a two-year low as foreign investors dumped shares, unnerved by the uncertainty in the rupee's slide which closed at a record low of 52.37 against the dollar. The Sensex dropped 365.45 points, or 2.27%, to end at 15,699.97, but off the day's low of 15,478.69.
The Nifty fell 105.90 points or 2.20% to close at 4706.45. Brokers said several foreign ETFs, which are facing redemptions at home, were selling aggressively.
Stop-loss triggers at many hedge funds and foreign banks set off after the Nifty fell below 4700 mid-way through the session, precipitating the decline. But for the short-covering later, indices would have ended much lower. Foreign investors sold shares worth Rs 1186.42 on Wednesday, according to provisional data.
"Investors in India are more worried about the domestic events than the issues in the US and Europe. There is a total chaos in the currency market, with no uncertainty about where the rupee is headed," said Sandip Sabharwal, CEO-portfolio management services of broking firm Prabhudas Lilladher.
Finance minister Pranab Mukherjee on Wednesday attributed the stock market crash to withdrawal of funds by foreign investors and depreciation of the rupee.
"The rupee's underlying fundamentals still appear weak to us, especially the absence of yield support at this important moment for the currency. Indeed, there is the outside chance of an onshore USD squeeze being the catalyst which propels USD/INR to the 54.8 technical objective," said Stewart Newnham and Yee Wai Chong, analysts at Morgan Stanley.
The decline on Wednesday pushed the Nifty below the 200-week moving average of 4776, analysts said. "This is a sign of further weakness in the market as this is a long-term trend indicator," said AK Prabhakar, senior VP, Anand Rathi Securities. The MSCI Asia Apex fell 2.5% after the indications of weakening in China, the world's secondlargest economy, came a day after the US cut its Q3 growth figure.
China's preliminary HSBC manufacturing Purchasing Managers Index fell sharply to 48.0 in November compared with a final reading of 51.0 in October. The euro fell 1% after Belgian newspaper De Standaard said that the planned rescue of Franco-Belgian bank Dexia is unworkable.
The report triggered worries that France's AAA credit rating may be under threat. Report said the European crisis is making it tough for European banks to access dollar funding in money markets. Euro/dollar cross currency swaps, which measure the cost of swapping euros into dollars, are at the most expensive levels since 2008, according to reports.
Source: www.economictimes.com
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