India stepped up efforts to help the rupee after its plunge to a record low, raising two interest rates in a move that escalates a tightening in liquidity across most of the biggest emerging markets.
The Reserve Bank of India increased the marginal standing facility and the bank rate to 10.25 percent from 8.25 percent, it said in a statement on its website late yesterday. The monetary authority said it will conduct open market sales of government bonds worth 120 billion rupees ($2 billion) on June 18, a step that would drain cash from the economy.
“The importance of this move is that it signals that the RBI is willing to act and make it much more costly to short the rupee,” JPMorgan Chase & Co. analysts Jahangir Aziz and Sajjid Chinoy said in a note. “These measures are only preconditions to the RBI squeezing rupee liquidity to engineer much higher short-term interest rates.”
India’s move yesterday leaves Russia as the only BRIC economy to not have reined in funds in its financial system, after Brazil raised benchmark rates three times this year and a cash squeeze in China sent interbank borrowing costs soaring to records last month. RBI Governor Duvvuri Subbarao kept the repurchase rate, the policy benchmark, at 7.25 percent in June as the rupee’s drop stoked price pressures, snapping a run of three cuts to fight the weakest growth in a decade.
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