Stopping rupee slide, the Subbarao way

RBI released Jan - March CAD figures, which was better than anticipated, before market hours and two trading sessions ahead of schedule

Reserve Bank of India (RBI) Governor D Subbarao, often criticised for being “behind the curve”, today took market players and his critics by surprise. RBI issued the January–March current account deficit data, better than anticipated, before market hours and two trading sessions ahead of schedule.

The move was widely interpreted as the central bank’s bid to calm nerves after the rupee breach yesterday of the psychological barrier of 60 to a dollar.

So, without spending a paisa from the foreign exchange reserves, Subbarao halted the rupee’s downward journey, at least for today. The  rupee closed at 60.20 as compared to yesterday’s close of 60.73.

The current account gap reduced to 3.6 per cent of gross domestic product for the March quarter, lower than the four per cent expected by the market and sharply below the earlier quarter’s 6.7 per cent.

The central bank has limitations on intervening in the currency market to stem the rupee fall, as the country’s $290 billion of foreign exchange reserves suffices for seven months of import. The rupee has depreciated about 12 per cent against the dollar since the start of May, the worst performing currency in Asia. This has mainly been due to investors resorting to the dollar on concern that the US Federal Reserve will diminish the pace of quantitative easing.

A high CAD also weighs on the rupee and RBI seems to have decided to ease matters here after a lok at the data. CAD figures are normally issued on the last working day of a quarter.

In the mid-quarter review of monetary policy, in which RBI decided not to cut interest rates due to the rupee’s continuing weakness, which could put pressure on prices, it had said it was ready to use any available instrument to respond rapidly and appropriately to any adverse developments. None expected, though, that bringing forward the release date of CAD data — key information for determining the direction of the currency swing — was part of the armoury.