The southeast Asian currency crisis at the beginning of 1998 put a downward pressure on the rupee. Speculators grabbed this opportunity to make a quick buck by arbitraging between money and forex markets. Panic dollar-buying in the second week of January saw the rupee dive by 200 paise. And a weak rupee during this period led to a steep rise in forward premiums.

One-month premium quoted at 23-24 per cent compared with 5-6 per cent earlier and six months at 14 per cent. Call rates ruled at 10 per cent.

A concerned Reserve Bank of India prescribed strong measures on January 16 to shoulder the rupee. The central bank made money dearer by sucking out liquidity from the system, hiking the bank rate by 2 per cent to 11 per cent and increasing the CRR by 0.5 per cent to 10.05 per cent. To dampen dollar-demand, the interest rate surcharge onimport finance was doubled from 15 per cent to 30 per cent.

The RBI also relaxed the measures imposed on banks' forex transactions by making squaring up of inter-bank positions at the end of a day's trading bank-specific. The apex bank waived the inclusion of nostro balance in banks' investment limit for overseas money market to meet genuine operational requirement in forex transactions.

These steps paid off and the rupee gained by 40 paise -- from 40.18/20 to 39.80. The rupee recovered further during the later half of January and touched 38.50/60.

However, the Pokhran nuclear tests on May 15 saw the rupee tumble past the 40 barrier for the second time in the year to a low of 41.70.

Between May and July, the rupee ruled stable at 40.18-42. On August 19, commerce minister Ramakrishna Hedge said: "The rupee could slip further, perhaps by another 1 per cent because the country is unlikely to meet its export growth target.'' This statement led to panic dollar-buying and the rupee crossed the 43 mark tohit 43.68/71. Speculators once again headed for the spot market. Delayed export proceeds and tight money supply in the system kept forward premiums at low levels.

The RBI, once again, announced a multi-pronged strategy to cut short the rupee's slide. The CRR was hiked from 10 per cent to 11 per cent, the repo rate was raised by 300 basis points from 5 per cent to 8 per cent to curb arbitrage between money and forex markets and prevent speculative booking by corporates. The RBI allowed 15 per cent forward cover on FIIs' exposure in equity and withdrew rebooking of cancelled forward contracts on imports and scrapped the facility to split forward commitments into spot and forward legs given to corporates in 1993.

The withdrawal of rebooking of cancelled forward contract stabilised the rupee to 42.31/36. Since then, the rupee has been steady at 42.40/53 as importers are keeping away from the market. The RBI may have to reverse its earlier measures announced on August 19 and allow importers to rebook cancelledcontracts."