Comes off intra-day low of 52.73 to close at 52.32 as central bank firefights volatility.
The Reserve Bank of India (RBI) tried to calm the nerves of foreign exchange market participants jittery over a depreciating rupee, which hit a new low on Tuesday.
The rupee closed at 52.32 a dollar as compared to 52.15 yesterday after hitting a lifetime low of 52.73 intra-day on sustained demand from importers, mainly oil refiners. The rupee has depreciated nearly 17 per cent from a 2011 high reached in late July.
RBI governor D Subbarao told reporters in Hyderabad the central bank would ensure exchange rate movement did not impair macroeconomic stability.
Subbarao, however, maintained that the RBI’s policy on foreign exchange management remained the same — to intervene only to curb volatility. “The foreign exchange rate for the last couple of weeks, particularly in the last three-four days, is being driven by global dynamics. And, clearly, to what extent it moves, in which direction it moves, will depend on a credible resolution of the external situation, particularly the sovereign debt problem in Europe,” Subbarao said. “So, we expect the reverse adjustment will take place when the European situation resolves itself. Till then, obviously, I can’t comment in real time about RBI intervening or not. But, we are watching the market,” he added. The failure of a US Congressional committee to reach a deal on deficit restructuring could trigger more selling in emerging market assets.
RBI deputy governor Subir Gokarn said over the past several days, the central bank had been exploring all possible options to curb the rupee’s fall. Last week, Gokarn said in an interview to a TV channel the RBI would use its foreign exchange reserves judiciously and would be careful about using reserves aggressively to protect rupee depreciation. Gokarn’s comment on Tuesday was seen as an indication the central bank was now relatively open to considering an intervention to curb rupee depreciation. Following the comments and aided by some intervention by the central bank in terms of selling dollars, the Indian currency came off the day’s low of 52.73. The recovery of the rupee was also aided by the euro, which moved up from $1.34 to $1.35, in the later part of domestic trade.
Analysts, however, said a mere intervention would not help the rupee unless backed by strong intent. “All fundamental factors are negative for the rupee right now, so any action from the RBI is not going to reverse the trend. The rupee will stay bearish till the euro-dollar pair recovers and domestic equity markets show some improvement,” said Moses Harding, executive vice-president at IndusInd Bank.
Finance minister Pranab Mukherjee also said an RBI intervention in the forex market would not help. He said the Indian currency was depreciating because of the withdrawal of foreign institutional investors from the domestic equity markets, and the global uncertainty was adding to the volatility.
The sharp depreciation will impact the domestic import bill, which in turn will influence inflation. The country imports almost two-thirds of its oil requirements. “It is disruptive, there is no question. There is an impact on our import bill, particularly for energy. It's having an impact on companies and is a problem,” Gokarn said. “The immediate impact, as has been pointed out, is possibly on the inflation rate, on other risk attributes,” he added.
According to dealers, there is an expectation a separate window for oil companies to buy dollars will be made available by the RBI. That will help the rupee appreciate. Such a move is, however, seen as temporary and not a long-term solution.
