The Reserve Bank of India (RBI) has set no target level for the rupee and would only limit volatility in the “market-driven” exchange rate, Deputy Governor Usha Thorat said in Singapore today. The rupee has advanced almost 12 per cent from a record low of 52.185 a dollar touched in March as the nation witnessed a revival in capital inflows. RBI’s ability to invest its foreign-exchange reserves, the world’s fifth-biggest, was limited by the current account deficit, she said.
“Our objective is only to manage orderly conditions in the market,” Thorat said, referring to the rupee. “There has been quite a two-way movement in the rupee, which continues to be an aspect of policy. We just manage the volatility and we’re not targeting any rate,” she added.
Goldman Sachs and UBS have said that India’s monetary authority would seek a stronger rupee to prevent rising import costs from fueling inflation. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials has climbed 35 per cent this year. RBI predicts that inflation will quicken to 5 per cent by the end of March from an average 0.5 per cent in September.
The rupee traded at 46.49 a dollar as of 3:32 pm in Mumbai, according to data compiled by Bloomberg. India’s foreign-exchange reserves rose by $430 million to $280.3 billion in the week ended October 2, the central bank said on October 9. The nation’s stock market has attracted $12.6 billion of foreign capital so far this year, more than twice from a year earlier.
Rising volatility
Implied volatility on one-month dollar-rupee options rebounded to 10.7 per cent from a 15-month low of 8.2 per cent reached on September 29, Bloomberg data show. Traders quote the gauge of expected swings in exchange rates as part of pricing options.
India’s current account slipped into a shortfall of $5.8 billion in the three months ended June 30, from a surplus of $4.75 billion in the previous quarter, according to RBI.
“When you have continuous current account deficits, the reserves you are building up are those on which you have some liability,” Thorat said. “For us, the degree of flexibility in the use of reserves is not the same as that in a country which has a surplus,” she added.
