Chandigarh: The Reserve Bank of India (RBI) will intervene in the forex market if inflows turn lumpy and volatile, its governor said on Friday.
The central bank on Thursday bought dollars to stem the rupee’s strength, traders had said -- a move which they believe was the RBI’s first intervention in 2010.
“We are watching the exchange rate situation. Our policy is quite clear, which we have said a number of times that we will intervene if flows are lumpy or volatile or if it disrupts the macro-economic situation,” Duvvuri Subbarao said.
“That remains our policy,” he told reporters at a press conference after the RBI’s board meeting in the northern Indian state, but declined comment when asked if the central bank had indeed intervened in the market on Thursday.
Subbarao said he would not elaborate on when the central bank will or will not intervene.
India has attracted a record $22.5 billion in inflows into stocks this year, which have put an upward pressure on the rupee.
Since the start of September, the rupee has appreciated 6.8% on foreign equity inflows of more than $9.5 billion, pushing the currency to a more than 25-month high.
India must manage capital inflows so that it can fund its current account deficit while at the same time not harming exports, deputy governor Subir Gokarn had said on Thursday.
Temporary liquidity squeeze
Outflows towards state-run Coal India’s initial public offering to raise up to $3.5 billion in the country’s biggest initial public offering (IPO) have been squeezing liquidity in the banking system.
The world’s largest coal miner’s IPO will open on Monday. “This IPO may add pressure (on liquidity) at least temporarily, so it is something that we will look at and if the circumstances warrant, we will think about responding,” deputy governor Subir Gokarn said at the press conference.
The Reserve Bank of India has been reluctant to intervene in currency markets, but may be forced to in coming weeks as foreign investors are expected to pour in billions of dollars to buy shares in the country’s largest-ever IPO.
Traders said an intervention at current levels would serve two purposes -- infuse liquidity into the system, which has a deficit of over Rs80000 crore according to the liquidity adjustment auction, and prevent sharp appreciation of the rupee.
Another deputy governor Shyamala Gopinath also said on Friday the central bank was closely monitoring the liquidity situation and would take appropriate actions as and when needed.