Reactions are pouring in over the Reserve Bank of India (RBI) move to increase Bank Rate by two hundred basis points to 10.25% on July 15 to restore stability to the foreign exchange market.
While commenting on the measures, M. S. Raghavan, CMD, IDBI Bank stated that "the RBI´s announcement of the increase in the Bank Rate is, in my considered view, primarily intended at regulating liquidity in the short term and to control volatility in the foreign exchange market. From IDBI Bank´s point of view, it is not a pointer to any change in interest rate regime".
"From our Bank´s perspective, we would like to affirm that we are not contemplating any increase in interest rate in the near future. As we see it, the RBI´s slew of measures announced yesterday are temporary in nature and specifically directed at containing irrational volatility in the foreign exchange market and carry no other significance."
Speaking on the measure, Rana Kapoor, Managing Director and CEO, Yes Bank Ltd, said,"There has been an overreaction in money markets in the aftermath of RBI's recently announced
measures to stabilise the Rupee. While the kneejerk response has resulted in hardening of rates, I believe, that the full import of these measures will eventually assuage sentiment and restore normalcy in money markets."
"In a move to stem the sharp Rupee depreciation and to reverse the negative sentiment around it, the RBI has taken measures to tighten money market liquidity. In our view, the bold
and unconventional measures are steps in right direction to stabilise the currency," Kapoor said.
"It is important to note that the measures taken by RBI are essentially transient in nature and should not be construed as a reversal in monetary stance as both repo rate and CRR were left unchanged. RBI is likely to continue to respond to fragile economic growth by keeping interest rates conducive once Rupee stabilises," the Yes Bank MD said.
"The kneejerk market reaction to RBI's measures resulted in hardening of rates across the yield curve. However, the rates have somewhat stabilised now indicating that the availability of funds within the banking system remains comfortable."
"We believe stability of Rupee and expectation of the same is likely to support growth in the medium term as it would help to curb risks on inflation as well as fiscal deficit which in turn
would provide strong cues for greater foreign investment flows," Kapoor said.
"To sum up, the measures taken by RBI will short circuit the negative feedback loop emanating from a weak currency. As long as long term-rates move in the right trajectory, the measures
should not have a substantial cost to the economy," he added.