RBI’s sale of dollars is evident from the position of forex assets. In the latest week ended June 27, they have dipped by Rs 8,418 crore.

S Raghavan, head of treasury-fixed income at IDBI Gilts said, “Had it been exporters selling dollars, it would have caused more funds to enter the banking system. This has to be RBI selling dollars in a bid to prevent a sharp fall in the rupee and also rein in money supply into the system at a time when price levels are close to the 12 per cent mark. This also helps the central bank control import costs, especially for oil companies.”

However, lack of money supply is not the only reason why banks are suffering. The demand side is also putting pressure on the banks. The central bank had hiked the CRR on 24th June to be effective from July. Since July 1, banks have had to keee a higher portion of their deposits in the form of cash reserves (CRR) with the central bank. Presently, the banks keep 8.5 percent of their deposits with RBI against 8.25 percent in June. However, by mid-July, CRR would increase to 8.75 percent leading to another hike in the deposits kept as CRR with RBI.

At a time when deposits are rising, the incremental CRR requirement also tends to go up. On the implication of this whole trend, YES Bank chief economist Shubhada Rao says, “The central bank is unlikely to resort to further monetary tightening on July 29. However, for the fiscal year as whole, some more tightening is expected.”