RBI further squeezes bank liquidity to drain cash to support rupee

The Reserve Bank of India (RBI) announced new measures to squeeze excess liquidity with the banking system in a bid to address volatility in currency markets.

The RBI, which has over the last two months instituted several measures to contain the volatility in the foreign exchange market, today announced plans to auction Rs22,000 crore of government cash management bills every Monday.

''On a review of the impact of these measures and for effective liquidity management, it has been decided that the RBI will auction Government of India Cash Management Bills for a notified amount of Rs22,000 crore once every week on Mondays,'' RBI said in a release.

The duration of the auction will be announced one day prior to the date of auction, RBI said.

RBI had, on 15 July, raised short-term interest rates on banks' overnight borrowings, in a bid to drain cash from the financial system, and followed it up with additional steps on 23 July.

These steps, however, failed to prop up the rupee, which has instead fallen to record lows since then, hitting a record low of 61.80 on Tuesday.

The rupee closed at 60.88/89 per dollar today, compared with 61.30/31 on Wednesday.

The government, meanwhile, is expected to announce new measures to attract foreign inflows to ease the current account gap, which may include raising money from Indians abroad and spurring state-run companies and banks to raise debt abroad.

The latest additional cash-draining steps, however, may act as a damper on investor expectations.