The Reserve Bank of India (RBI) has fixed Rs 35.70 to the dollar as trigger point for intervention, as the trend in the forex market in the last few days indicate. Forex dealers point out that Reserve Bank had always intervened when the rupee appreciated beyond 35.70.
This trigger point will be severely tested in the coming months as inflows increase; Over $1.5 billion is expected from the issues of MTNL ($850 million), RIL ($ 300 million), IDBI ($300 million), ICICI ($150 million) and IPCL.
This aside, the stream of external commercial borrowings, foreign direct and institutional investors, and NRI investments will add to inflow.
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P Sampath Kumar, manager (treasurer) of IndusInd Bank, The RBIs intervention level at 35.70 is nothing but a psychological level at which the dollar is supported. The RBIs presence keeps banks from selling their excess dollars (something banks would be prone to doing in the present flush conditions), thus, preventing a dollar glut.
Ravi Pai, vice-president of the foreign exchange department, said, By capping the rupee at a particular level 35.70 current the RBI sends a message to the market of its intention to curb any undue appreciation of the Indian currency.
This could generate some demand for the spot and forward dollars in the market itself. As of now, buyers are keeping out as they expect the rupee to strengthen further.
The market view that the rupee will harden further is supported by the rupee movements over the last few months.
RBIs intervention cap kept moving up as it had to contend with the dollar glut and excess money supply. Thus a rupee-dollar parity of 35.65 is not ruled out.
The central bank seems to have made the money market its priority over the forex market.
With both markets grappling with a liquidity hangover, its support to one market adversely impacts the other.
Its forex intervention is currently limited to making nominal dollar purchases to prevent the rupee from rising above Rs 35.70. This way, it controls the rupee inflow in the money market.
Kumar said there is a certain section of the market that believes the RBI should leave the rupee-dollar parity to find its own level. However, there is a strong case for protecting export competitiveness.
As Vijay Gera, chief dealer (forex and corporates) of Banque Indosuez, says, The competitiveness of exporters have been greatly diminished with the rupees appreciation against the dollar as well as the dollars appreciation against other currencies.
The mark depreciated from 1.40 (per dollar) to 1.81 in last 2 years; the swiss franc from 1.25 to 1.48 over the last two years. Hence, exporters who have not hedged themselves against the benchmark cost stand to lose heavily.
Indias exposure to other major world currencies is around 10-15 per cent.