Market alone decides Re movement: RBI

Gov keeps close watch on inflation, rules out change in rupee policy.

Reserve Bank of India Governor Y.V. Reddy shot down the widespread belief in the market that inflationary pressures and the surge in money supply were influencing its policy on the rupee.

Over the last few trading sessions, the RBI has stayed away from the foreign exchange market. During this period, the rupee has appreciated by 1.1 per cent, prompting foreign exchange dealers to believe that the RBI has changed its foreign exchange policy and stopped intervening in the market to contain inflationary pressures.

Speaking to reporters on the sidelines of a seminar in Mumbai, Reddy said the central bank's foreign exchange policy was to allow a market-driven exchange rate and it did not have a target for the rupee.

The RBI's sterilisation exercise in the foreign exchange market was releasing rupees into the system as for every dollar it buys from the market the central bank pumps in an equivalent amount of rupees. This adds to money supply which in turn can stoke the fires of inflation.

"That type of linkage (between inflationary pressures and the exchange rate) should not be seen. The exchange rate is based on demand and supply and all we try to do is to ensure that there is not much volatility," he pointed out.

Reddy said the central bank was keeping a close eye on inflation as international commodity prices had risen sharply. "By and large there has been a hardening of prices in international commodity markets by over 20 per cent in dollar terms," he said, adding, "The domestic factors are favourable. So we also have some cushion to handle any such pressures, going forward."

The rupee, which breached the psychologically important 45 level early this week, today closed at 44.73/74 against the dollar ""virtually unchanged from yesterday's closing level. However, during the day it slipped by 5-6 paise to touch 44.7850 to a dollar because of the demand for dollars from oil companies.

Forward premiums, though they remained range bound, witnessed importer covering. Importers covered their payments in the long term (six months and one month) to take advantage of the appreciating rupee. They feel that these levels cannot be sustained for a long period.

Until recently, the RBI had been intervening in the currency market by mopping up dollars and curbing the gains of the Indian currency unit. The foreign exchange reserves of the country are now over $109 billion.

The rupee appreciation

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Winners

• Sectors like gems and jewellery, which are import driven
• 5% of India's exporters who have shifted to euro invoicing

Losers

• Textiles, handicrafts and, marine exporters, depending heavily on US and Canada, have seen realisation dip
• Buyers of sports goods moving to Pakistan to beat the rupee appreciation