Limit on Swiss franc temporary

Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on Wednesday said the limit on the franc-euro exchange rate was a measure to deal with temporary factors. Yesterday, the Swiss National Bank had decided to set a limit on the franc at 1.20 against the euro to arrest further appreciation of the currency.

“Switzerland has decided the burden of inflows, as a result of the turbulence around them, is putting pressure on their currency in a way that is disrupting their real sector, so they have decided to react,” said Gokarn. He said it was an attempt to deal with temporary factors and not, in any way, an abandonment of their fundamentally floating exchange-rate system.

The Swiss currency had hit 1.03 against the euro last month. The Swiss franc has been appreciating from 1.68 against the euro since late 2007. The Swiss National Bank said it could not tolerate an exchange rate below 1.20 francs per euro and was prepared to buy foreign currency in unlimited quantities to ensure the minimum rate. The move was in the interest of the economy and the exporters, it had said.

Gokarn said RBI's view on exchange rate management remained the same. “We have not faced that situation so far, so our stance remains,” he said. The central bank has not intervened in the foreign exchange market since November 2010.

Driven by strong cash flows in and out of the emerging market economy, the rupee has been trading close to Rs 45 against the dollar since the start of this financial year. “We are looking to not target the exchange rate. If there is pressure of any kind that disrupts the real sector, we would consider intervention,” said Gokarn.

The euro was trading at 1.41 against the dollar today, compared with 1.40 yesterday. It had touched 1.45 last week.