* Daily borrowing limit under repo 0.5 pct of deposits
* 99 pct of cash reserve balance with RBI from July 27
* RBI to sell 60 bln rupees of cash management bills July 25
* Investors worry about economic growth, current account gap
By Neha Dasgupta and Suvashree Dey Choudhury
July 23 The Reserve Bank of India took new steps
on Tuesday to support the rupee, signalling it will stay the
course with its defence of the currency despite the risks to
The central bank tightened liquidity further and made it
even harder for lenders to access funds with measures including
lowering the amount banks can borrow or lend under its daily
The latest moves come a week after its initial steps
steadied the rupee somewhat, but left the currency still within
sight of a record low of 61.21 hit on July 8.
However, bond yields - especially shorter-term rates - have
surged, threatening to raise borrowing costs for banks and
companies and sparking concerns about the impact on an economy
growing at a decade low of 5 percent a year.
These worries, combined with a record high current account
deficit and now uncertainty over the central bank's monetary
policy stance, have prompted foreign investors to sell $11.5
billion of Indian debt and equities since late May.
The RBI is intervening more frequently in spot markets,
traders said, coming in late in the session or whenever the
rupee threatens to break below 59.89, the level at which the
currency traded before the RBI's initial measures on July 15.
The central bank's steps, though meant to be temporary, are
a clear indication of its renewed focus on financial stability,
putting a monetary easing campaign intended to revive growth on
"These measures of trying to reduce domestic liquidity and
making funding costs higher may not be very effective to support
the rupee," said Siddhartha Sanyal, chief India economist at
"There is a risk that capital inflows in the equity market
can get dented as these steps put more pressure on growth in the
medium term," Sanyal said.
The RBI on Tuesday lowered the overall limit for borrowing
under the daily liquidity adjustment facility (LAF) - which
offers funds in exchange for collateral - for each bank to 0.5
percent of deposits from 1 percent.
The central bank also said banks now needed to maintain 99
percent of their daily cash reserve ratio requirements - the
deposits they must set aside - with the RBI, compared with 70
percent now. The change takes effect from the two-weekly period
starting July 27.
The RBI also announced the sale of 60 billion Indian rupees
($1 billion) of short end cash management bills to drain out
more cash from the banking system.
The rupee has risen only 0.2 percent since the RBI's
unprecedented steps last week to try to create demand for the
currency by aggressively draining cash from money markets and
sharply raising short-term interest rates.
However, bonds yields have surged across maturities, with
10-year benchmark bond yields up 62 basis points
since the RBI's initial measures.
The Indian government is also contemplating steps to plug
its current account deficit, including raising money from
non-resident Indians (NRIs) via debt or deposits, according to
senior government officials on Monday.
Still, the government has also made clear all options to
support the rupee are on the table.
Continued falls in the rupee - down more than 10 percent
since May partly in a reflection of a broader selloff in
emerging markets - could prompt stronger measures either from
the RBI or the government.
The RBI may intensify its efforts to drain liquidity and may
even resort to an outright hike in the policy rate, analysts
The central bank holds its next policy review on July 30.