The Reserve Bank of India (RBI) yesterday mopped up about $100 million in the inter-bank forex market to curb the upward movement of the rupee, which was sparked off by finance minister P Chidambarams statement in Japan opposing RBI intervention to weaken the rupee vis-a-vis the dollar.
Commenting on the view of some analysts that the rupee was over-valued and should be weakened, Chidambaram told Reuters Financial Television, I do not think we should induce a deprecation just to boost someones confidence. Once you say the rupee will find its level in the market, then you must leave it to the market.
Analysts said the finance ministers statement was mistimed.
The rupee opened at 35.86-87 on Friday and closed stronger at 35.84-85 on the same day. Yesterday, the rupee moved in a narrow range of two paise, opening at 35.84-85 and later climbing to 35.82-83.
However, the reference rate yesterday was 35.83 per dollar, against 35.87 on Friday.
The reference rate is based on the quotes offered at noon by some select banks in Mumbai. The appreciation reflected the anticipation by banks that the rupee might move up in view of the finance ministers statement.
The statement sent a wave of panic through exporters, who have been asking the RBI to depreciate the rupee. Although the central bank contradicted the finance ministers statement by actively intervening in the market to stem the rupee rise, exporters remain wary. As one analyst pointed out, The timely intervention of the RBI saved the day, but tomorrow is another day.
Exporters want a much weaker rupee as this makes their products cheaper in foreign markets. According to Kishore Shah, convenor of the banking committee, Federation of Indian Exporters Organisation (FIEO), the rupee is
slightly overvalued compared to the differentials between the inflation rates of India and its major trading partners. He pegs the current dollar rate at 37.75, considering a real rate of 36.5 in October 1996, discounted for the inflation rate of 7 per cent over the last seven months.
Harish Desai, partner at A V Rajwade and Company says, The RBI needs to intervene to bring down the rupee to the inflation adjusted levels as rupee appreciation in real terms adversely affects export competitiveness. A lower rupee - 36.25 - would bring the exchange rate closer to inflation adjusted levels.
The participation of the RBI brought the rupee down, said Ravi Vasantraj, Vice President at Mecklai Financial and Commercial Services. This intervention is warranted. Exports such as textiles are going to be hit. We are already facing competitiveness in agricultural exports as Pakistan and Sri Lanka have devalued their currencies. As of now, a stronger rupee has no economic justification.
Commenting on the RBI
