RBI steps to check rupee slide may backfire, hurt growth: Experts

Reserve Bank's steps to stem the rupee slide could "backfire" and hurt growth by pushing up short-term interest rates, experts said.

Last Updated: Jul 16, 2013, 20:20 PM IST

New Delhi: Reserve Bank's steps to stem the rupee slide could "backfire" and hurt growth by pushing up short-term interest rates, experts said.

"There is a risk that the measures could backfire. India's growth rate is already very weak and tighter domestic liquidity will worsen the financial conditions for corporates and banks, hurting asset quality and the growth outlook," said Japanese financial services major Nomura.

Expressing similar opinion, Bank of America Merrill Lynch said the measures would push back softening of interest rate and lowered India's growth forecast for 2013-14 to 5.5 per cent from earlier projection of 5.8 per cent.

"We need to see if the RBI backs today's monetary action by issuing NRI or sovereign bonds," it said, adding that the reversals of FII debt flows are linked more to the emerging market debt sell-off than any India specific phenomenon.

RBI last night announced steps like raising the cost of borrowing for banks by 2 per cent to 10.25 per cent, and sale of bonds worth Rs 12,000 crore through open market operations to suck liquidity so as to check the rupee slid, which had earlier in the month touched all-time low of 61.21 against the US dollar.

Global banker Barclays said the RBI's move will impact the banks and NBFCs.

"If the higher rates were to persist (depending on how long RBI adopts this stance) and impact GDP growth then that would impact the entire banking system negatively," it said.

Meanwhile, an HSBC report said the RBI's move to tackle rupee volatility is likely to provide only "some short-term relief" to the currency. According to it, the rupee is likely to trade around 59 per US dollar by the year-end.

"On a medium term however, the rupee is expected to remain under pressure as the current account deficit and the ability to attract long-term foreign capital inflows are still major hurdles, as is external market volatility," it said.

Investment banker Credit Suisse said it will be "interesting" to see whether the government also weighs in with further measures to help the currency.

"So far, it has focused on ways to help ease the financing of the current account deficit as well as trying to cut demand for gold and oil imports. We suspect this will continue with the launch of a new bond designed to appeal to Non-Resident Indians (NRI) possible in time," it said.