MUMBAI (Reuters) – The Reserve Bank of India (RBI) will continue to take steps to stabilise the rupee, but the currency’s direction will ultimately depend on capital flows, Subir Gokarn, a deputy governor at the central bank, said on Monday.
“We have done a number of things and will continue to do things that we think will have an impact of stabilising the currency,” Gokarn said at the sidelines of an industry event.
“But ultimately capital flows are going to be the main determinant of how the currency behaves,” he added.
The rupee fell below the key psychological level of 55 against the dollar to hit a new record low earlier in the day, setting up the prospect of further falls unless the RBI takes measures or intervenes more aggressively, traders said.
The central bank has largely failed to stop the rupee’s fall despite selling dollars and taking steps to attract inflows through deposits and exporters foreign currency holdings.
Gokarn also said the RBI was likely to buy bonds through its open market operations (OMOs) this week.
“Since we’ve been working with the benchmark of around one percent of the net demand and time liability (NDTL), we did an OMO last week. We’re likely to do one this week as well, just to make sure that the gap is not widening,” he said.
Demand for funds from banks is likely to be high this week because lenders borrow more at the start of the two-week reporting cycle, and a $2.7 billion debt sale on Friday will further add to liquidity pressures.
Banks borrowed 1.04 trillion rupees from the RBI’s repo window on Monday, significantly higher than the RBI’s comfort level of around 600 billion rupees, indicating the extent of liquidity strain in the system.
However, the weekly capacity for OMOs is limited by market conditions, but the central bank will continue to do them as and when the liquidity situation warrants, Gokarn said.
(Writing by Shamik Paul; editing by Malini Menon)