Finance ministry against ‘undue’ forex mkt intervention

Finance ministry against ‘undue’ forex mkt intervention

New Delhi: Finance ministry is not in favour of any “undue" intervention by the central bank in the forex market to prop up the rupee, a senior finance ministry source told Reuters on Wednesday, a day after the local currency hit a record low against the US dollar.

Economic growth in second quarter could be slightly less than 7%, the source said, adding that growth could pick up in the third and fourth quarter and end the fiscal year at around 7.75%.

The government will release official figures of GDP for the second quarter ending September next week.

The rupee on Tuesday slid to an all-time low of 52.73 against the US dollar as foreign investors continued to pare their exposure to Asia’s third-largest economy on lingering global uncertainty and mounting worries over the domestic economy.

“We are not in favour of undue interventions by the Reserve Bank except to check volatility, because of macro-economic implications for the next year," the source, who declined to be named, said.

“The rupee is depreciating mainly because of external reasons which are outside our control."

The partially convertible currency, however, bounced back more than 1% on Wednesday after suspected central bank intervention.

The comments endorse the stand taken by the Reserve Bank of India (RBI), which has always maintained that it does not protect any particular level of the rupee and would only intervene to iron out excessive volatility.

The Reserve Bank of India operates independently on monetary issues but often consults the government on important policy moves.

“We expect the rupee to remain around 50 for next three months," the source said.

“It should firm up to around 45 over a period of 5-6 months...if the situation in the euro zone does not deteriorate."

Finance minister Pranab Mukherjee on Tuesday also blamed the fall in the rupee on the international market and said that central bank intervention would have a limited effect.

Subir Gokarn, a deputy governor at the central bank, had said last week the RBI would be careful about using foreign exchange reserves aggressively to protect the rupee’s depreciation..

At 11:30 a.m., the rupee was trading at 52.02/03, 0.5% stronger than 52.2950/3050 at close on Tuesday.

Foreign funds have sold more than $500 million worth of shares over five trading sessions till Monday, reducing the net inflows in 2011 to under $300 million, sharply below record investments of more than $29 billion seen in 2010.

The official said government is taking measures to revive business sentiments and attract capital inflows.

The government has already raised ownership limits on government and corporate bonds and is considering allowing international retail investors direct access to Indian stocks , which have slumped about 22% so far this year.

It is also considering allowing foreign direct investment in the country’s struggling domestic airlines.