RBI will intervene in rupee spiral, but will retain reserves

Paris: The Reserve Bank of India (RBI) will intervene to smooth sharp movements in the rupee and prevent a downward spiral in its value, but will balance this with the need to retain reserves in the event of prolonged turbulence, its deputy head said today.

Subir Gokarn, a deputy governor of the Reserve Bank of India, said the bank was not targeting a specific exchange rate with its interventions. The rupee slid to an all-time low of 52.73 against the dollar on Tuesday, but bounced back more than 1 percent on Wednesday after suspected RBI intervention.

“The response is really…trying to remove sharp movements. That is the kind of technical and judgement criteria we used when we decided to intervene but that has not been with the objective of targeting a rate,” Gokarn told reporters in Paris.

[caption id=“attachment_138675” align=“alignleft” width=“380” caption=“The rupee slid to an all-time low of 52.73 against the dollar on Tuesday, but bounced back more than 1 percent on Wednesday.AFP”] [/caption]

“We need to balance out the short-term risk of an uncontrolled spiral (in the rupee) with the medium-term risk of ensuring that we have adequate reserves to deal with a potentially prolonged market turbulence,” he said. “Our approach to the rupee is going to be determined by this balancing act.”

He said administrative and capital flow measures to ease overseas borrowing rules for corporates announced by the central bank on Wednesday were part of its broader approach.

“These are certainly measures which will support the pricing, and will take some of that spiral risk out of the picture but we will have to continuously monitor the situation and make judgements about where the risks are heading,” he said.

The rupee is under pressure as foreign investors are paring their exposure to Asia’s third-largest economy amid global uncertainty and mounting worries over the domestic economy.

The rupee has lost around 14 percent of its value in 2011 to be the worst performing currency in Asia.

Reuters