Rupee stability main concern for RBI: Gokarn

Following the slide of the rupee to 53.04 to a dollar after closing at 52.97 on Wednesday, the Reserve Bank of India’s, Deputy Governor Subir Gokarn said that the stability of the rupee is the main concern for the central bank.

“I think the main concern is not so much what the value is, than it is stability,” Gokarn told CNBC-TV18 on Thursday.

The rupee weakened 15.8 percent in 2011, its biggest annual loss since 2008, as foreign capital took flight on growing concerns about India’s current account deficit, its poorly performing stock market and an uncertain global economic outlook.

But, Gokarn said the said the REER (real effective exchange rate) movement towards neutral indicates rupee is stabilizing at current levels. He says the intervention of the apex bank in forex markets, to reduce volatility, has helped.

REER is the rupee’s value against a basket of currencies of India’s largest trading partners, adjusted for inflation. The Reserve Bank had all along said it can only intervene to the extent of reducing volatility and not control the absolute value of rupee.

However, he also clarified that the RBI has no intent to let the currency be driven by motivations or by forces other than fundamental demand-supply.

“In addressing this, we have done three kinds of things over the past month and a half. One is we have raised limits in terms of FII investment into bonds. So this was a USD 10 billion increase, half for government securities, half for corporate bonds. We have raised interest rates on Non Resident deposits into the Indian banking system, which then makes Indian residents abroad a little more willing to perhaps send their money back,” he told CNBC-TV18.

Gokan also warned that companies with high forex exposure will need to hedge effectively.

“Of course the next phase is essentially a function of whether capital inflows revive. That’s the global uncertainty part of it,” he said.

Speaking about inflation, another menace that has been spiralling in India, Gokarn said momentum indicators suggest that it is slowing but may gain if crude spikes up dramatically.

The RBI, which has raised its interest rates 13 times since March 2010, left its key lending rate, the repo rate, steady at 8.50% last month.

Watch the CNBC-TV18 video interview: