NEW DELHI: As the coronavirus scare saw Indian bourses report the steepest fall in stock prices since 2008, with foreign institutional investors pulling out, the rupee on Thursday crashed to `74.24 to the dollar, hitting a 17-month low. To try and stem the huge fall in the value of the Indian currency, the Reserve Bank on Thursday announced that it would come up with six-month US dollar swaps, with the first tranche worth $2 billion opening next Monday, to try inject liquidity into the foreign exchange market. This would be the first of a series of swaps that it may announce, officials said.
“Flight to safety has led to spike in volatility across all asset classes, with several emerging market currencies experiencing downside pressures,” the RBI explained. Foreign Institutional Investors (FII) sold equity in Indian bourses to repatriate hard currency to safer havens in the US and Europe.
“This is a typical reaction that we see whenever global or domestic causes lead to a stock market crash — FIIs pull out and the rupee weakens. The question that begs an answer is how long this will last,” said Vikram Sahny, an investment consultant and director of Sahny Securities Pvt Ltd, one of the oldest stockbroking firms in Delhi.
“On a review of current financial market conditions and taking into consideration the requirement of US dollars in the market, it has been decided to undertake six-month US dollar sell/buy swaps to provide liquidity to the foreign exchange market. The swaps will be conducted through the auction route in multiple tranches. The auctions will be multiple price based, i.e., successful bids will be accepted at their respective quoted premiums,” RBI said.
Analysts believe that with RBI opting for multiple swaps, the reading is that the global stock markets may continue to be in a tumultuous situation with emerging markets bearing the brunt of the crash. “Emerging market currencies are expected to continue to be under attack,” said Sahny. Data put out by the Institute of International Finance shows that February portfolio flows to emerging markets at $3.4 billion were down nearly 90 per cent compared to January. This trend is believed to have worsened in March, according to analysts.
“The main reason is of course fears surrounding the coronavirus pandemic,” said finance ministry officials who, along with RBI, took stock of the currency situation. The RBI also said it is closely and continuously monitoring the rapidly evolving global situation and spillovers, and pointed out that India has a healthy foreign exchange position at $487.24 billion as on Monday, which “remains comfortable to meet any exigency.”
States told not to move deposits
New Delhi: The Reserve Bank of India (RBI) has asked state governments not to transfer their deposits out of private sector banks saying apprehensions about the safety of deposits in private lenders are highly misplaced. In a letter to chief secretaries of all states, RBI said moving deposits out of private sector banks could have implications for banking and financial sector.