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RBI Steps Different to Uphold Rupee

The Reserve Bank of India put few novel steps on Tuesday to hold up the rupee, signaling it will keep on the course with its defense of the currency despite the risks to economic expansion. The central bank made tighter liquidity further and made it even tougher for lenders to access funds with measures including worsening the amount banks can scrounge or lend under its daily liquidity window. The most recent moves come a week after its preliminary steps stabled the rupee to some extent, but left the currency quite within sight of a record low of 61.21 hit on July 8. These worries, joint with a record high present account scarcity and now ambiguity over the central bank's financial policy posture, have encouraged foreign investors to sell $11.5 billion of Indian debt and equities since late May. The RBI is prevailing more repeatedly in spot markets, traders said, coming in late in the session or whenever the rupee menaces to break under 59.89, the level at which the currency traded before the RBI's early measures on July 15. The central bank's steps, though meant to be temporary, are a clear indication of its renewed spotlight on financial stability, putting a fiscal easing campaign intended to revitalize growth on hold. "These measures of trying to decrease domestic liquidity and making funding costs elevated may not be very helpful to support the rupee," said Siddhartha Sanyal, chief India economist at Barclays. "There is a threat that capital inflows in the equity market can get hurt as these steps put more stress on growth in the medium term," Sanyal said. The RBI on Tuesday lowered the generally limit for borrowing under the daily liquidity adjustment facility (LAF) - which offers funds in exchange for security - for each bank to 0.5 percent of deposits from 1 percent. The RBI also publicized the sale of 60 billion Indian rupees of short end cash management bills to sap out more cash from the banking system.

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