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India eases FX inflows after rupee skids

India’s central bank announced measures on Friday to bolster foreign currency inflows following a sharp fall in the rupee, although traders said the moves may not be enough to stem further near-term weakness.

The rupee is down about nine per cent since the start of March and suffered steep falls in the last three sessions before recovering its daily losses on Friday. The Reserve Bank of India is believed to have stepped into the market to defend the currency on Wednesday and Thursday, and possibly Friday, traders said.

However, with limited reserves and India’s negative balance of payments, the RBI has little firepower to defend the rupee. Encouraging dollar inflows would lend support to the currency.

The rupee lost 2.3 per cent this week, closing at 53.47/48 to the dollar, putting it close to the record 54.30 plumbed in December. Traders blame the drop on worry about India’s current account and fiscal deficits as well as new tax proposals.

“These measures will aid from the sentiment perspective, but a structural solution will be addressing the fiscal deficit, current account deficit and growth,” said Hitendra Dave, global markets head at HSBC in Mumbai.

The RBI relaxed the interest rate ceiling on foreign currency non-resident (FCNR) deposits of banks with maturities of one year to less than three years to 200 basis points above the LIBOR or swap rate, from 125 basis points now. On three to five-year maturity FCNR deposits, the rate ceiling will be relaxed to 300 basis points above LIBOR.

The central bank also allowed banks to freely determine the interest rates on export credit in foreign currency.

“Maybe some foreign fund inflows will be augmented because of this step, but I don’t think it is enough to stop the downward fall of the rupee,” said Ashtosh Raina, head of foreign currency trading at HDFC Bank.