1. Central bank may go for direct funding of crude buys, bond
issue
The Reserve Bank of India may be forced to announce some measures in the next few days
or weeks to arrest the rupee’s slide, which is likely to worsen as the threat of the US Federal
Reserve tapering bond purchases has triggered a flight of dollars back to America.
Some of the steps may include the much-anticipated direct funding of crude oil purchase by
Indian Oil, floating NRI bonds, and reducing the overnight exposure of banks to curb
speculation, said people familiar with RBI’s thinking.
Indeed, if interest rates in the US, which have risen by more than 100 basis points in past
two months, continue to advance due to the strengthening economy, India may have to
follow the example of Indonesia — which also runs a current account deficit — and raise
interest rates. The extent of pressure on the rupee became clear when one month non-
deliverable forwards (NDF) rose to Rs. 61.35 on Friday afternoon in a market battling
reduced liquidity, said a trader. NDF is a cash-settled, short-term forward contract where
trades happen overseas. “We are in a situation where RBI could be looking at a few
immediate steps,” said Arvind Narayanan, executive director and head (sales, treasury
& markets) at DBS India. “RBI could look at curbing discretionary non-trade payments
overseas, or money retained outside may be ordered back into the country. RBI may also
look at opening a special window from where oil companies could buy dollars, so that it does
not disrupt the over-the-counter forex market.”
The rupee is the worst-performing Asian currency as foreign funds pulled out $5.4 billion
from Indian debt in June. Curbing Gold Import hasn’t Helped
Foreign funds also sold Indian debt worth more than Rs 4,000 crore this month, data from
the regulator shows. On Friday, the rupee closed at Rs 60.24 to the US dollar.

2. The government and the central bank have been trying to curb demand for gold, one of the
main causes of aggravating external deficit, by imposing stringent cash conditions on
importing the metal and also raising the import duty on it. But the pressure on the rupee
continues because global investors, who were borrowing at zero interest rates in the US to
invest here, are now selling assets in anticipation of higher borrowing costs in America. On
Friday, US treasury yields jumped to 2.73%, their highest since August 2011.
Topping the list of dollar consumers are oil companies, which require an average of $300
million a day. And the demand for dollars will only accelerate with nearly $172 billion of loan
repayments coming up in the next one year.
With the current account deficit at 4.8% of the gross domestic product and real interest rates
remaining negative compared with the consumer price rise, the central bank may have to
raise interest rates to attract flows.
“To stem the rupee’s fall, we may even need to raise short-term interest rates,” said Srinivas
Varadarajan of Mount Nathan Advisors, which advises hedge funds. “When rates are raised
during times of outflows, foreign investors appreciate it as the right measure.”
Capital flows into emerging markets such as India may be reversing given that the US may
start slowing $85 billion of monthly bond purchases. The fear of an imminent slowing has
triggered a selloff in emerging markets.
India’s foreign exchange reserves fell $3.2 billion in the week to June 28, to $284.6 billion.
Brazil sold $1.9 billion worth of currency swap contracts on Friday to stem the real’s decline
in the twelfth day of intervention in past five weeks, Bloomberg reported. Indonesia’s
reserves fell to $98.1 billion in June, from $105.15 billion in May. But India’s situation seems
worse, given the slowing economy and uncertainty about policy decisions ahead of the 2014
elections. Global investors are afraid that populism could squander the fiscal discipline that
was beginning to emerge.

3. “The current macro circumstance is hardly a magnet for long term capital,” said Glenn
Maguire, chief economist at ANZ. “India is moving into a particularly problematic period
where funding difficulties on the current account may arise. Indeed, the type of long-term
funding that India so desperately needs is likely to remain adverse.”
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