Rupee gains after falling sharply on Subbarao's comment

Reserve Bank of India reiterates it has no target for exchange rate

After falling for three trading sessions, the rupee marginally gained on Thursday after falling sharply following Reserve Bank of India (RBI) governor D Subbarao’s statement that RBI does not have a exchange rate target.

“On the volatility of the rupee, I cannot say anything more than the standard policy of the Reserve Bank, which is that we employ instruments available to us in order to manage volatility," Subbarao said in Chennai after the central bank’s board meeting. “We don't have an exchange-rate target. We do not have an exchange rate band. We try to manage volatility in the currency movement,” he said. Following the statement, the rupee fell against the dollar by around 35 paise, wiping out its earlier gains.

Dealers said the statements raised concerns RBI is unlikely to defend any particular level strongly. The rupee had touched a low of 60.39 in intra-day trades. During the closing hours, it gained due to dollar sale by custodian banks and exporters.

The rupee ended at 60.13 per dollar, compared with the previous close of 60.22. The rupee had opened at 60.11 and during the day it had touched a high of 59.91. “The rupee recovered due to dollar sale by custodian banks and exporters due to which it ended stronger compared with previous close,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

Subbarao once again flagged the central bank's concerns on India's wide current account deficit (CAD). “The sustainable CAD for the economy, as several people have said including the Reserve Bank, is 2.5 per cent. If the CAD in year before last was 4.2 per cent and last year was 4.8 per cent, it is a matter of concern. We should be working towards reducing CAD to sustainable levels,” said Subbarao.

The street is now awaiting two crucial data from the US — non-farm payrolls number and  unemployment data. Any recovery may lead to concerns of Fed's pullback of quantitative easing, said dealers.

“The rupee is expected to trade in the range of 59.50-60.50 a dollar tomorrow and the bias is more towards weakening,” said a currency dealer.

Strengthening of the rupee also helped the government bond market. “Due to strengthening of the rupee, yields fell. Yields also fell because the liquidity situation has improved and there was buying interest,” said  S Srinivasaraghavan, executive vice-president and head (treasury) at Dhanlaxmi Bank.

The yield on the 10-year benchmark bond 7.16 per cent 2023 ended at 7.42 per cent, compared with the previous close of 7.50 per cent. Banks are looking to tap the Collateralised Borrowing and Lending Obligation market over RBI’s liquidity window. CBLO volumes touched a record high of Rs 1,03,390 crore on Thursday, up from Rs 1,01,108 crore on Wednesday. While borrowing by banks under RBI's Liquidity Adjustment Facility was Rs 6,180 crore, compared with Rs 10,880 crore on Wednesday.