When it comes to managing the rupee, RBI has always been proactive using the various tools at its disposal to keep the rupee within a tight range. It has done a commendable job in managing it in 52-56 range for nearly a year. But a sharp rise in interest rates in the US resulted in FIIs withdrawing money from the debt as well as equity markets.As a result,nearly Rs 40,000 crore (around $7.2 billion) left the shores in a month.This shock withdrawal destabilized RBI’s rupee management strategy.
After refusing to interfere in the market in initial days, the central banker had to step in to stem in as importers started to panic and rushed to hedge their position, thereby adding to the volatility. With a limited war chest of foreign exchange reserve, the central banker had to control the market by other means. However, in doing so it seems to have tightened the market further, bringing in more controls and restrictions.
The central bank increased margin money on the futures exchange, which led to some speculators squaring off their position and helping rupee stabilise a bit. The other move was to ask oil companies to purchase dollars from a single bank. Oil companies used to ask for quotes from various banks, giving an impression in the market that there are many buyers. However, dealers argue that this move is cosmetic in nature as it will result in only the number of quotes going down and not the actual demand for dollars. In fact, say dealers, a single bank buying can result in spikes in the currency movement when they come to buy.
While the general view as reported in the media was that rupee will bounce back sharply after the central bank restricted dollar buying by oil companies through one bank, rupee has remained largely unchanged. One way of reading the situation is that pressure on the rupee is so high that the move has largely been ineffective. While another view is that market has seen through the central bank’s strategy.
What these moves suggests is that RBI is running out of options in controlling the currency. Its tightening of controls are seen as signs of the central bank trying to hold the reigns tightly. An economy that has managed to control its current account deficit by inflow of ‘hot money’ in equity and debt market is now paying the price when the reverse flow has started.
RBI had tried to warn the government earlier on the kind of money that was coming in, but when the going was good nobody wanted to listen. Now that the money is going out, government has said they want to work closely with the central banker to restrict the slide. RBI however, has few options but to intervene in the market directly if the flows continue.