RBI to intervene in forex market only to smoothen volatility

RBI to intervene in forex market only to smoothen volatility

Mumbai: The Reserve Bank of India (RBI) will maintain its stance of intervening in the foreign exchange market only to smoothen volatility, deputy governor Subir Gokarn told CNBC TV-18 on Friday, after the rupee touched its weakest level in more than 28 months.

“We at this point do not see any intervention from a rate targeting view point. That is something that would reflect a change in policy stance, which we are not doing at this point," Gokarn told the television channel in an interview from New York.

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“If we do intervene at all, it will be with a very narrow objective of smoothening what might be a very volatile market situation, nothing beyond that," he said.

Several analysts have called for the RBI to intervene in the forex market in order to prevent the recent sharp depreciation in the rupee from fuelling imported inflation, which could add to already high domestic price pressures.

The RBI has always maintained that it does not use the rupee as a tool for inflation management. However, in its latest policy, it said a falling rupee may have adverse effects on inflation.

“One should not look at our exchange rate policy within the narrow boundaries of inflation management," Gokarn said.

“There is larger logic and context to our exchange rate policy and we have over the last few years allowed the rupee to float within the broader structural boundaries of debt limitations or debt restrictions, so that policy remains," he added.

His comments come on a day when the rupee hit 49.90, its lowest since 14 May 2009, and a day after it shed 2.5% to post its biggest single-day loss in nearly three years.

The local unit has declined nearly 12% from its 2011 high of 43.8550 against the dollar reached in late July.

At 12:08 pm, the partially convertible rupee was at 49.65/66 per dollar, off the day’s low of 49.90 and 0.2% below Thursday’s close of 49.57/58.

“It is important for people to recognize that volatility in the exchange rate is a part of the game now and your investment or return calculations have to take that into account and you have to decide how you are going to hedge that risk," Gokarn said.

The RBI has refrained from intervening in the foreign exchange market for eight straight months until July, latest central bank data showed earlier this month.

However, there has been speculation in the forex market over the last few days that the RBI may have stepped in to support the local unit.

Several traders had said the RBI likely sold dollars on Thursday. However, this can only be confirmed when the central bank releases the intervention data for this month in November.