India tries to stem rupee's decline

India Dispatch: The Reserve Bank of India loosens interest rate regulations in an attempt to attract more money into the country and halt the rupee¿s continuing slide.

A cashier counts Indian rupee bank notes in Allahabad, India. AP Photo

The Reserve Bank of India (RBI) will allow banks to set their own interest rates on a number of non-resident Indian (NRI) deposit schemes in an attempt to attract more money into the country and halt the rupee's continuing slide.

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The easing of interest rate rules allows banks to set their own rates on NRI and some other accounts that were previously fixed by the central bank.

"With a view to providing greater flexibility to banks in mobilising non-resident deposits and also in view of the prevailing market conditions, it has been decided to deregulate interest rates," the RBI said.

The freeing of rate ceilings came after a week in which the battered Indian currency experienced its sharpest declines. The currency, which closed last weekend at 52.04 to the dollar, had fallen to a record low of 54.30 last Thursday. The rupee was at 52.87 yesterday. This year, the currency has fallen by more than 18 per cent.

The move allows banks to offer higher interest rates on non-Indian deposits, enabling them to attract more money from NRIs.

"Even over the medium-term, the freedom to price these deposits dynamically should enable banks [to increase] the proportion of NRI deposits in their overall deposit base, which over the years had been declining," said Vaibhav Agrawal, the vice president of banking research for Angel Broking.

The RBI is now seriously worried about the rupee. In addition to freeing the saving and deposit rates, it put restrictions on forward contracts in rupees by withdrawing the facility to cancel and rebook forward contracts. A forward contract is a fixed agreement either to buy or to sell foreign currency at an agreed price at a specified time in the future.

Although this contract locks in the dollar price to protect the investor against changes in the exchange rate, market players say the facility was being misused by speculators to take bets against the rupee.

The measures taken by the RBI were only seen as temporary, however. "While the RBI's efforts to prop up the rupee provided some bounce back, the weakness will continue for some time to come," said Dharmakirti Joshi, the chief economist at CRISIL, a ratings agency in India.

Economists say there is an increased demand in dollars, which puts further pressure on the rupee. "Dollar is the flavour of the month because Europe is doing so badly. The currency inflows are down and the demand for dollar is up, which is causing the slide," Mr Joshi said.

Market watchers said the RBI's interventions came just in time, otherwise the rupee would have hit 55 or even higher against the dollar. "Once the rupee went past 53, the RBI had to wake up. They watched and waited and until things got really bad and then they moved," said Sudip Bandyopadhyay, the chief executive of Destimoney Securities.

Mr Bandyopadhyay said NRIs looking to invest can take advantage of the situation. "It's still good news for the NRI investor. Firstly, right now it is a great time to bring in money in fixed-income instruments or long-term deposits. Secondly, looking at long-term, interest rates will have to come down,which …is also good news for stabilising the economy," he said.

But economists in Mumbai are not expecting the rupee to rebound any time soon.

"The rupee will remain volatile for the next two quarters and will remain in the 52-56 bracket," said Arun Singh, an economist from Dun and Bradstreet. "The fundamentals of good economic growth are in place but the biggest concern is the sentiment in Europe and elsewhere, which is causing the jitters.

"I don't see any rebound much before summer."

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