The Reserve Bank of India (RBI) might intervene to weaken the rupee and protect exporters, if the currency appreciates past 43 against the US dollar, a finance ministry official with direct knowledge of the matter said.
The government was comfortable with the rupee trading between 43 and 45 to the US currency, the official said late on October 15, asking not to be identified because the issue is sensitive.
The rupee has climbed 3.5 per cent to be Asia’s second-best performer in Asia outside Japan in the past month, as foreign fund flows into the nation’s surging stock market reached a record $23 billion this year. India would join countries from Japan to Brazil that have sold their currencies to keep exports competitive as the global recovery loses momentum.
“Global demand is already weak and many are starting to intervene,” said Sonal Varma, a Mumbai-based economist with Nomura Holdings Inc. “We won’t be surprised if RBI did start intervening before 43 as well.”
Policy makers weren’t in favour of curbing capital flows from overseas, and planned to protect exporters mainly by intervening in currency markets, the official said. The last time the central bank attempted to influence the exchange rate was in November 2009, when it sold a net $36 million, according to data on RBI’s website.
Killing exports
Infosys Technologies, the second-biggest software maker, last week called for capping the currency’s strength, saying rupee volatility will “kill” exports. Sharad Kumar Saraf, vice-president of the Federation of Indian Export Organisations, called for a mechanism to exclude “hot money” blamed for rapid appreciation and prevent the “distortion” of the exchange rate.
RBI might sell the rupee to curb gains in the currency, Deputy Governor Subir Gokarn signaled last week, while Governor Duvvuri Subbarao said “lumpy and volatile” inflows would attract intervention.