D-Day: RBI strikes back

ImageToday, the Reserve Bank of India (RBI) will auction short term Cash Management Bills (CMBs) in the market. This step by RBI is seen as a dire desire to contain the liquidity and Indian Rupee in the market.

Under this scheme, every Monday the RBI will auction an amount of Rs. 22,000 crore of CMBs, wherein, ┬áit will be selling Rs11,000 crore each in two CMBs maturing for 35 and 34 days on Monday and Tuesday, respectively. Although, the CMBs will carry characteristics of Treasury bills but the major difference lies in flexible maturity date. Unlike Treasury bills which carry fixed maturity date like 30 days, 91 days, 182 days, the CMBs will have flexible maturity dates between seven days and one year based on RBI’s view on prevailing market situation. RBI did sell CMBs On 25th July, 2013 which was for 28 and 56 days.

Will it strike and contain Indian Rupee?

Since the measure is for short term liquidity the CMBs will attract many institutional investors and fund houses as the bill maturing before 60 days will not be evaluated based on the prevailing market price thus fund houses will be free from any kind of accrued profits/losses in case of rise or fall in these CMBs.

Second point, this measure will keep the Indian Banks form speculating the Indian Rupee in the currency market as sell of CMBs will keep the short term liquidity at an elevated level thus there will be no leeway for banks to speculate Indian Rupee.

As the fall of Indian Rupee can be attributed to many economic factors but there is no doubt the speculative market is prudent enough to create further damage to the Indian Rupee in the currency market. Hopefully, this move will try to contain Indian currency in coming months.