The easy liquidity conditions in the money market and huge forex inflow have brought to the forefront the several issues related to exchange rate management. The huge dollar mop up of over 1.6 billion in March has injected liquidity of over Rs 6000 crore in the system. The RBI will seek to strike a balance between limiting its intervention while keeping the importers and exporters happy by maintaining the exchange rate at a suitable level.
Foreign currency assets climbed by $4.256 billion in the last financial year to $22.3 billion as on April 4, 1997 despite the substantial repayment hump in the last quarter of the last fiscal.
Euphoria among FIIs following the Union budget has led to huge dollar inflows. Besides, the oil majors have sought other means to meet their import repayment requirements. This has caused the spectre of rupee depreciation to recede for the short term. RBI's intervention policy over the last six months reveals the central bank's intention to gently guide the rupee to a weaker position vis-a-vis the dollar while tempering any volatility along the way. Market sources said in the present circumstances, the rupee will range between 35.83 on the higher side and 35.93 on the lower side while the premium will hover around seven per cent.
A section of economists, in pre-budget talks with the Dr C Rangarajan, governor of RBI, had suggested that the RBI cease its intervention and allow the exchange rate to be determined by market forces.
However, the various imperfections in the Indian market make the intervention necessary. Too much of rupee depreciation could hurt imports and manufacturing costs. Too much of an appreciation would hurt export competitiveness.
The situation can be stabilised in the long run only by sustained inflows from exports which is not happening. While the present dollar inflows are good, much of the supply is from bulk off-loading by exporters who are presently in a state of panic and from FIIs. Hence, the situation in the medium to long run remains uncertain.
Analysts suggest that the support to exporters could be in the form of lower interest rates on export refinance provided to banks. It may also consider allowing FIIs, particularly those who are allowed to invest in debt, to book the dollar at forward rates.
