The Reserve Bank of India (RBI) has been saying its intervention in the forex market is to curb volatility in rates and not for setting them. The rupee has been appreciating in the last one month, buttressed by the prediction of a top official of the government – who is also a member of RBI’s central board of directors – that the rate may reach Rs 50 to a dollar in a few months. It might be his personal view, but the market is interested in his observations because of the position he holds. The finance minister also said in Washington DC recently that he would like to see the domestic currency appreciate to provide some relief to inflation. Taking advantage of the appreciation of the currency, RBI should start building up its reserves by buying forex in small amounts, say, $100-200 million, on a more or less daily basis. It will not upset the market, given the small magnitudes, if it is unobtrusive. It will also enhance liquidity in the system facilitating government borrowings in the coming months. RBI should informally aim at building up its foreign currency assets to up to $300 billion.
A Seshan Mumbai
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