Stocks took a hit Tuesday on Indian markets after the central bank, acting to check the falling rupee, raised short-term bank lending rates.
The rupee, however, strengthened Tuesday after the central bank action.
The Bombay Stock Exchange's 30-share Sensex, with financial sector stocks falling, plunged more than 360 points early Tuesday before paring some of the losses as the day progressed. The broader National Stock Exchange index Nifty also shed more than 100 points in intraday trading, dropping below the 5,800 level.
The Reserve Bank of India, the country's central bank, announced a number of steps on its website Monday night to curb the volatility of the Indian currency, which had fallen to an all-time low of more than 61 last week to the U.S. dollar and has remained weak since.
The rupee has been hit both by India's weak economic numbers and the likelihood of the U.S. Federal Reserve tapering off its stimulus program, which would reduce the availability of cheap money for investing in emerging markets like India. There has been a sharp outflow of funds from India in recent weeks with growing dollar demand, causing the rupee to weaken.
The bank Monday increased the marginal standing facility rate and the bank rate to 10.25 percent from 8.25 percent to address the exchange rate volatility and soak up excess liquidity, making loans costlier. The marginal standing facility allows commercial banks to borrow money from the central bank at a higher rate during liquidity shortage.
Among other steps, the bank said it will limit lending of overnight funds to banks. It will also conduct open-market sales of about $2 billion in government debt on Thursday.
One analyst told the Times of India the central bank measures will have wider implications on the economy as cost of funds goes up. However, the report said, the steps would likely to be eased when the rupee stabilizes.