Rupee to cheer Raghuram Rajan's arrival; may open at 66/$

The new Reserve Bank governor announced a slew of measures on his debut day in Mint Street. These reforms are likely to have a positive impact on the rupee. The Indian currency will, in all probability, open at 66-66.25 against the dollar, reports CNBC-TV18's Latha Venkatesh.

This is because some immediate dollar inflows are possible after what governor Raghuram Rajan announced on Wednesday.

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Banks can now raise capital upto 100 percent of their tier-I capital. They can raise foreign debt to the extent of 100 percent of their tier I capital until now it was 50 percent. So, if one is Rs 100 crore of tier-I capital, he/she can raise Rs 50 crore externally.

If the entire Rs 100 crore is raised then the Reserve Bank of India (RBI) has said that it will swap it for rupees at 1 percent less than the market rate. And this window is open only till November 30, so one can expect banks to rush with that proposal very quickly and take advantage of that 1 percent point.

This is primarily because everyone is strapped for liquidity, so a little bit of money coming in, a window open to raise cheap funds will be taken with both hands by the banks.

The other possibility of dollar inflows after a couple of weeks perhaps is that foreign currency non-resident (banks) window, where the RBI is agreeing to swap dollars at just 350 bps for a long tenure deposit- a three year tenure.

If one swapped it in the market, from dollars into rupees, he’d have to pay a minimum of 5.5 percent. Now that RBI is giving it at 2 percentage points less, it is basically like raising deposits. The market rate is 10 percent, and one gets to raise it at 8 percent because RBI is giving that 2 percent subvention. Bankers will try to hawk this product too.

This will take a little bit of time but it could succeed in getting dollars. Most importantly, if the sentiment improves, the depth of the market is likely to improve with importers and exporters getting more elbow room to sell and rebook, that this restriction has come on that. So, partly sentiment and partly expected flow of dollars is expected to take the rupee to 66/USD and all of that is coming at a time when the global markets are also slightly in the green.