Attributing the depreciation of rupee to global factors, the government today said RBI will intervene in the forex market only in case of volatility.
On exchange rates, the Mid-Year Analysis, 2011-12, tabled in Parliament said, currency markets worldwide are known to exhibit some tendency to 'overshoot' periodically.
"...The view we take is that intervention should be limited and confined to cases where there is volatility and not to alter the trend," it said.
Analysts in India are worried about the recent depreciation of rupee, saying it would put pressure on inflation, signal a loss of confidence and indicate widening of current account deficit (CAD).
"...None of these concerns are warranted," the review tabled by Finance Minister Pranab Mukherjee in Lok Sabha said.
The review said some volatility is due to global currency markets and "has very little to do with India".
Secondly, allowing some flexibility in market rates is entirely appropriate and usually self-correcting and, given India’s higher inflation, some of the depreciation, merely reflects this, it said.
The Reserve Bank of India had intervened in foreign exchange market for the first time in September 2011 by selling $845 million to reduce excess volatility in rupee exchange rate as against US dollar, the report said.
In the current fiscal, the monthly average exchange rate of rupee depreciated by 5.6 per cent from Rs 44.97 per US dollar in March 2011 to Rs 47.63 per US dollar in September 2011. Last month the rupee touched the historic low of 52.73 against the dollar.
On the concerns related with current account deficit, it said capital flows are relatively flat, and remittances and NRI deposits are very stable, as is FDI.
"This dwarfs any concerns about potential for 'hot money' flows. (Besides), global slowdown could also cool down fuel and commodity prices," the economic review said.
