India squeezes liquidity to defend weakening rupee

Reserve Bank of India issues slew of policy directives.

RBI took steps to tighten banking system liquidity and support the flagging rupee, aggressively reducing its daily borrowing window and ordering banks to set aside high daily cash reserves.

The new moves come only a week after RBI took exceptional measures that made liquidity tighter and costlier for banks to stem the rupee’s decline and reduce volatility.

RBI also lowered the overall limit for borrowing under the daily liquidity adjustment facility that offers funds in exchange for collateral.

The central bank also said banks needed to maintain 99% of their daily cash reserve ratio requirements with it as against the previous 70%.

Analysts said these measures seek to reduce domestic liquidity and make funding costs higher, but might not be very effective to support the rupee.