RBI’s rupee defense sending bill rates to three-year high

Bloomberg

The Reserve Bank of India’s (RBI) intervention in the foreign-exchange market to protect the rupee that tested a series of record lows in recent months is pushing shorter rates to multi-year highs.
The government’s borrowing costs for a three-month Treasury bill surged to the highest in three years at an auction. The weighted average call rate, an interbank overnight rate closely followed by the central bank, rose to 5.09%, a level last seen in 2020.
Financial conditions are tightening globally as the central banks raise interest rates to curb price pressures, and the RBI is expected to follow the Federal Reserve in extending rate hikes at its policy review due next week. The sharp surge in rates show the impact of the RBI’s moves since late last year to gradually whittle down pandemic-era stimulus.
“Persistent FX intervention to cap rupee losses and elevated government cash balance may probably keep liquidity tight and rates elevated in the short term,” said Kanika Pasricha, an economist at Standard Chartered Plc in Mumbai. The currency fell to an unprecedented 80 a dollar last week.
The government spending has not materialized with New Delhi’s cash balances with RBI estimated at 4 trillion rupees, which is also contributing to the cash shortage, said Saugata Bhattacharya, chief economist at Axis Bank Ltd.
Excess banking liquidity dipped to 1.5 trillion rupees, its lowest since 2019 from the 2022-high of nearly 9 trillion rupees, as tax outflows also weighed, according to data compiled by Bloomberg Economics. That prompted the RBI to do a 3-day repo auction to inject 500 billion rupees last week.
Inflation will remain the RBI’s key priority with a 50-basis-point rate hike likely next week, said StanChart’s Pasricha.