Volatility in exchange rate to stay, says Gokarn; RBI intervention only to target excess in this regard.
The Reserve Bank of India’s intervention in the foreign exchange market on Friday helped the rupee to rebound after hitting a 28-month low yesterday.
The rupee closed the day at 49.43 per dollar, stronger than Thursday’s close of 49.58, when it suffered the biggest single-day loss in 15 years. Intra-day, it went close to breaching the psychological 50-mark, to 49.90 levels, dealers said. However, the RBI is likely to have sold dollars from around 49.60 per dollar, which helped the rupee.
Subir Gokarn, RBI’s deputy governor, who is on a visit to the US, said on a television channel that volatility in the currency exchange rate had become “a part of the game” and RBI intervenes to curb excessive volatility.
“Your investment or return calculations have to take that (volatility) into account and you have to decide how you are going to hedge that risk,” he said.
RBI had not intervened in the foreign exchange market for nine months in succession, till July. However, it had stepped in to stem the rupee depreciation on three occasions over the past week.
Gokarn reiterated RBI’s stance, on intervention only to smoothen excessive volatility in the exchange rate. “We, at this point, do not see any intervention from a rate-targeting viewpoint. That would reflect a change in policy stance, which we are not doing at this point. If we do intervene at all, it will be with a very narrow objective, of smoothening what might be a very volatile market situation; nothing beyond that,” he said.
Adding: “There is larger logic and context to our exchange rate policy and we have, over the last few years, allowed the rupee to float within the broader structural boundaries of debt limitations or debt restrictions. That policy remains.”
Traders said the rupee would not be able to stay strong. Growing concern on the impact of a possible Greek default on the banking sector would negate any move by India’s central bank to support the rupee.
According to Kotak Mahindra Bank’s chief economist, Indranil Pan, the rupee could witness further depreciation. “The sudden weakness has been led by the recent risk aversion globally. The Indian currency could be poised for more near-term depreciation with the absence of any intervention from the RBI,” he said.
In the near term, there appears a risk of the rupee breaching the 50-mark, but from a more medium-term perspective, we should see the rupee settle in a range of 46-49, unless there is an absolute meltdown in the global markets, Pan added.
