No rate or yield targeting, liquidity watch the focus: Gokarn.
The Reserve Bank of India on Tuesday said it would not be changing stance on the policy of exchange rate management. Which is, it maintained, no intervening to help a falling rupee till it saw extreme volatility.
“Our approach to the rupee is that we are not targeting any specific rate. We intervene when there is extreme volatility. The objective is only to smoothen that volatility,” said Subir Gokarn, deputy governor.
He was clear on there being no coming to the rescue for traders who hadn’t hedged their risks.
RBI had intervened in the foreign exchange market in September. The rupee closed at 50.67 to the dollar on Tuesday, as compared to 50.29 yesterday.
Also, with successive devolvement of government securities and benchmark yields around nine per cent, RBI says it will concern itself with maintaining adequate liquidity in the economy.
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"RBI does not target yields; our objective is to manage liquidity," said Gokarn. If the underlying driver of high bond yields or any kind of distortion is liquidity, then the solution is to address the latter issue, Gokarn added.
Adding: “Borrowing (by banks) through the LAF (Liquidity Adjustment Facility) has been above the one per cent benchmark and government cash balances have been negative. We will be watching these patterns closely, to know if they are temporary or likely to persist.”
Responding to criticism on the ineffectiveness of successive rate rises on monetary transmission, he said transmission was reasonably effective when liquidity was in deficit and even though banks may say they are not going to pass it on, the data shows otherwise.
"Banks may not change base rates but they will certainly negotiate on spreads or they may turn down the requests. Either way, the transmission is being achieved," said Gokarn. A majority of banks have kept their base rates unchanged despite consecutive rate increases of 25 basis points each.