The rise of the Japanese yen against the greenback as well as 15 other global currencies has been causing havoc in equity markets the world over. But closer home, the fall of the rupee against the US dollar is being cheered by bankers and, of course, corporations that earn through exports.
“The falling rupee will make the Reserve Bank of India’s job easier,” says a senior executive of a Mumbai-based private bank, under the condition of anonymity.
On Monday, the rupee fell 0.9% to Rs44.695 against the dollar before ending the day at Rs44.64, its biggest drop since 15 May 2006. However, it appreciated on Tuesday to close at Rs44.30, following the rally in the equity market.
If the rupee continues to fall against the dollar, triggered by the outflow of foreign funds, RBI will probably refrain from intervening in the foreign exchange market. It has been buying dollars from the market to prevent the rupee from appreciating heavily against the dollar as otherwise, export competitiveness of India will be dented.
However, for every dollar the central bank buys an equivalent amount of money is injected into the system. RBI then sucks out the liquidity either by raising banks’ cash reserve ratio (CRR) or auctioning government bonds, as a liquidity overhang adds to inflationary pressures. “If the rupee falls against the dollar, RBI will find it easy to manage liquidity,” the executive says.
The Indian rupee had strengthened to 44.03 level at the beginning of February. In July 2006, the rupee was weakest against the greenback touching the 47.5 . “The rupee is depreciating and this means the smaller hedge funds, which have kept the central bank worried are pulling out funds from the market. This is a good thing.” says a forex dealer with a foreign bank.
“RBI’s concern is that the dollar should not move either ways too fast. If the dollar remains at the current level it certainly does reduce the central bank’s concern as the hedge funds begin to pull out money from the system.
This would then mean that RBI would not have to use to another monetary tool to take away liquidity,” says Partha Mukherjee, head of treasury at UTI Bank.
He refuses to take a call on the movement of the rupee, since the rupee seems to be closely tracking the equity markets. “I think the forex market will be very volatile in the short-term (even though) the sentiment is still strong,” Mukherjee says.