Rbi Urged To Support Dollar

The exporter community, led by the Federation of Indian Exporters Organisation (Fieo) have made several requests to the Reserve Bank of India (RBI) to support the dollar.

In order to prevent the erosion of export competitiveness the RBI intervened in the market to buy dollars amounting to $500 million this week, sources said. Kishore Shah, convenor of banking committee, Fieo, said that in discussions with the apex bank, Fieo had pointed out that as long as the rupee did not depreciate vis-a-vis inflation, export growth will be affected. While inflation rules at seven to 7.5 per cent levels, the rupee has depreciated by only three to four per cent over the last year. Moreover, competitors in core areas such as Pakistan and Bangladesh had also devalued their currencies last year. This has also brought fear to exporters.

 

Referring to fundamentals analysts said, with the trade deficit higher at $5.4 billion in 1996-97 from $4.5 billion in 1995-96, and inflation at levels of seven to 7.5 per cent, the rupee should weaken.

"The rupee strengthening on expectations of good inflows over the last two months was a sign of market imperfections. Such a phenomenon would not have happened in a developed market,"said an analyst.

Analysts feel that the Reserve Banks intervention policy should be based on the real effective exchange rate (REER) which is the nominal exchange rate adjusted for inflation differentials between India and its major trading partners, as this would contribute towards the market's deepening.

At present this works out to around Rs 36.5 per dollar. They feel that the RBI intervened either to protect export competitiveness or to stock up on its reserves.

While the tight money-market conditions gave the apex bank the leverage to enter the market, it did not do it to infuse money in the markets as the current tightness is likely to be only temporary. As an analyst explained, the RBI has targeted money supply at 15.5 per cent. On April 11, money supply stood at 16.6 per cent, clearly above the target.

Since the RBI's intervention is financed by printing of more notes, it could affect the money supply target and possibly the inflation target. The Reserve Bank of India has not yet intervened in the forward segment.

However, dealers feel the strengthening of the spot dollar by 12 paise to 35.87-88 on May 7, the lowest levels the rupee has seen since the RBI began its aggressive post-budget intervention on March 3, will have a ripple effect on forward dollar premiums.

The rupee strengthening on expectations of good inflows over the last two months was a sign of market imperfections. Such a phenomenon would not have happened in a developed market.