India's government raised the central bank's currency intervention firepower on Wednesday, a day after it imposed limits on foreign borrowings by local firms in an effort to stem the strength of the rupee.
The Reserve Bank of India said the issue ceiling on bonds it can use to absorb funds generated by its currency intervention had been raised to 1.5 trillion rupees ($37 billion) from 1.1 trillion rupees.
The new ceiling for the fiscal year ending in March 2008 would be reviewed if outstanding issues of market stabilisation scheme (MSS) bonds exceeded 1.35 trillion rupees, the central bank said in a statement. The outstanding balance of MSS bonds, including an auction held on Wednesday, was 989.7 billion rupees, it said.
Analysts said the second increase in the ceiling this year - it was previously raised in late April - would give the central bank more control of the supply of cash in the money market, and that bond yields were likely to rise on Thursday. "The RBI itself has been surprised by the kind of liquidity," said Pradeep Madhav, chief operating officer at Securities Trading Corp of India.
The RBI has bought billions of dollars to rein in the rupee, which, powered by foreign investment inflows, has risen about 10 percent against the dollar this year to nine-year highs, causing policy headaches. The intervention releases rupees into the local money market, which adds to inflationary pressures. To remove, or sterilise, the cash, the central bank in March resumed sales of MSS bonds.
"To absorb the liquidity already infused, the increase in the ceiling on MSS will help," said S.P. Prabhu, head of trading at IDBI Gilts, adding tighter cash conditions would push bond yields up.
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