New Delhi: The rupee’s depreciation is only a short-term disruption which does not require central bank intervention, a senior official in India’s finance ministry said on Wednesday.
The Reserve Bank of India (RBI) has always maintained that it does not target any specific exchange rate and only intervenes to prevent excessive volatility in the foreign exchange market.
The RBI has stayed away from the foreign exchange market for eight straight months until August, its monthly bulletin showed on Tuesday.
The partially convertible rupee ended at 47.62/63 to a dollar, weaker from Tuesday’s close of 47.59/60, but off its intraday low of 48.02, a level last seen on 29 September 2009.
Worries Europe’s debt problems may snowball into a banking crisis roiled global markets and pushed investors to the dollar’s perceived safety and also weighed on the rupee.
“This is something that is a very short period kind of disruption. So I don’t think we need to give up a policy for short-term disruption,” R. Gopalan, the economic affairs secretary at the ministry of finance, told reporters.
However, some market participants said the RBI may have intervened on Wednesday to arrest a sharp fall.
TV reports however had quoted some sources as saying that the RBI had not stepped in to protect the rupee. Dealers said the rupee’s recovery was mostly driven by euro and some dollar inflows.
The rupee has shed 8.7 percent since its highest level of 43.855 to the dollar, reached on July 27 this year.
“The rupee has underperformed especially as dollars have been pulled out of Asia and India to safe havens outside, so it could slip to 48.5 or even 48.8 as early as next week before it stabilises,” said Jonathan Cavenagh, senior forex strategist at Westpac Institutional Bank in Singapore.
Any sharp fall in the rupee will inflate India’s import bill, as oil accounts for more than 80 percent of the country’s total imports.
Benchmark Brent crude futures was trading at around $112 per barrel by 0857 GMT, coming off from its $116 per barrel perch at the beginning of August, weighed by concerns on the fragile outlook for the United States and the euro zone.
However, a depreciating rupee could nullify the advantage.
Gopalan admitted as much and said that a weak rupee will push up the cost of Indian imports but endorsed the RBI’s stated position of not intervening in the markets unless it is forced to smooth out volatility.
“I think the RBI is following a good policy by not intervening,” he said.
So far in 2011, the rupee has depreciated by around 6.5% and is the worst performer among its Asian peers.
“There cannot be much that can be done about the rupee depreciation situation right now,” said Kaushik Basu, the chief economic adviser to the finance ministry.
If the depreciation in the rupee continues for long, it could inflate India’s trade deficit and put pressure on the current account deficit.
With demand holding up in some quarters, Indian imports grew about 42% in August while trade deficit stood at $14.1 billion, provisional trade figures released by Trade Secretary Rahul Khullar last week showed.
Analysts said that the medium-term outlook for the rupee on a 6-12 month horizon could be around 44 to the dollar level, but only if the global economic outlook improves.
Separately, sources in the finance ministry said a meeting on Thursday will decide on raising the limit on overseas borrowing, which is currently at $30 billion. The meeting is also expected to decide on allowing overseas debt in yuan.