Currency and sentiment crash, loans to be dearer

New DelhiThe rupee on Monday plunged 2.3 per cent, or 148 paise, to end at 63.13, its biggest single-day fall since September 22, 2011. (IE Photo)

The rupee on Monday plunged 2.3 per cent, or 148 paise, to end at 63.13, its biggest single-day fall since September 22, 2011, but neither the finance ministry nor the Reserve Bank of India made any public moves to arrest the decline.

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But the effect of the sustained fall has begun to impact banks. Major banks including HDFC Bank and Axis Bank have begun to raise lending rates, which means people planning on festival loans will have to do a rethink.

Monday's hands off approach by the RBI is in sharp contrast to the raft of measures taken by it to shore up the currency, including partial capital controls announced a day before Independence Day. From Friday's opening of 61.35, the rupee went all the way up to 63.30 on Monday before closing at 63.13 to a dollar.

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Since July 15, the central bank has taken steps almost every week to keep the rupee stable but in this calendar year it has dipped by over 12 per cent against the dollar, making it the worst performing Asian currency.

With the rupee down, the price of govenment of India benchmark bonds has gone haywire. The yield on the bond, which is the reverse of its price, went up to 9.26 per cent on Monday. The high yields will make the cost of government borrowings higher and put pressure on the fiscal deficit.

R Sivakumar, head, Fixed Income at Axis MF, said while the initial fall in the rupee was in line with other Asian and emerging markets, "it is now falling in response to the monetary and administrative decisions taken in the past month.

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