Rupee sinks below 66, RBI assures street of using forex reserves

Rupee plunged below the Rs 66 level against the dollar for the first time in almost two years

At a time when the rupee has been volatile, the Reserve Bank of India (RBI) governor Raghuram Rajan assured the street that the central bank will have no hesitation in using foreign exchange reserves in a bid to reduce volatility.

“We have approximately $ 380 billion in reserves to be used as and when the need arises. We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee,” said Rajan in his speech at FIBAC 2015.

RBI has about $ 355 billion foreign exchange reserves and another $ 25 billion in forward purchases. “These are not required until next year to meet foreign currency FCNR liabilities,” he said. Rajan added that once market volatility settles down, India should emerge once again as an investment destination of choice. 

In recent times despite the volatility in the rupee due to China devaluing yuan, the rupee has performed better than the volatility in currency against the dollar witnessed by Russian ruble, Malaysian ringgit, Turkish lira and Taiwan dollar.

The rupee today touched a low of 66.73 per dollar compared with Friday’s close of 65.83. At 4:30 pm, it was trading at 66.68 per dollar. 

Rajan also highlighted that there is no long run trade-off between growth and inflation. “The best way for a central bank to ensure sustainable growth is to keep demand close to supply so that inflation is moderate,” he said.

Since the start of 2015, RBI has cut the repo rate or the rate at which banks borrow from the central bank thrice by 25 basis points each time but monetary transmission by banks have been slow. The repo rate currently stands at 7.25 per cent.

“If the central bank cuts the interest rate by 100 basis points today, and banks pass it on, then demand will pick up and we could get stronger growth for a while, especially if economic players are surprised. The stock market may shoot up for a few days. But if the economy is supply constrained, we could quickly see shortages and a sharp rise in inflation,” explained Rajan adding that the central bank may then be forced to raise interest rates substantially to offset that temporary growth.