A costly defence
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RBI's interventions to curb the rupee slide could end up constricting investment and growth
The RBI stepped up its defence of the rupee by sharply tightening liquidity and pushing up interest rates. The measures might be effective in preventing further rupee depreciation, but they could also hurt hopes of reviving investment and growth. One of the significant steps taken by the RBI has been to restrict the amount banks can borrow from it to 20 per cent lower than the current level. It will conduct open market operations, selling bonds to further reduce liquidity in the market. Call rates have responded by going up, above the corridor of the repo and reverse repo.
The biggest question confronting the banking sector is whether this will merely flush out what the RBI believes is speculative capital affecting the rupee or hurt domestic bank lending, already suffering from the impact of declining investment and growth. Will it mean an increase in the lending rates of banks at a time when the economy can ill afford it? And if it does, what was the need to do it? While companies that recklessly undertook unhedged foreign currency exposure will benefit from actions preventing further depreciation, firms that were sensible and did not borrow in dollars will now have to face higher costs. The already slipping growth in employment will take longer to revive.