On Monday, the currency rose above Rs 42 against the greenback for the first time since June, 1998, surprising foreign exchange traders and analysts.
MUMBAI: Inflation may be denting the real value of the rupee, but it has been acting up against the almighty US dollar. On Monday, the currency rose above Rs 42 against the greenback for the first time since June, 1998, surprising foreign exchange traders and analysts, who did not expect the rupee to rise so quickly.
From around 45.60 in August, 2006, the rupee has soared to close at 41.90 on Monday, an unprecedented rise of close to Rs 4 in less than nine months.
The rupee’s meteoric rise has been helped by robust dollar inflows and sales by exporters. But it has been helped most by inaction from the Reserve Bank of India (RBI), which is usually very touchy about letting the currency rise too much for fear of losing export competitiveness.
Bank treasurers say it is a conscious strategy of the central bank to douse inflation by not buying too many dollars. When it buys dollars, the Reserve Bank ends up pushing in a whole lot of rupees into the system, increasing liquidity.
“Inflation, interest rate and exchange rate management are three important functions of the RBI, but they don’t always go together. By letting the rupee go, the RBI has shown a clear resolve to tackle inflation,” says Manoj Rane, country treasurer of French bank BNP Paribas.
If inflation is the main target, does this signal another rate hike by the central bank in the monetary policy due on April 24? The market is still divided on this.
Though a rate hike can’t be ruled out given the recent proactiveness of the RBI, treasury heads are keeping an eye on the short-term liquidity situation, particularly at the end of this week.
"The RBI has lent Rs 13,500 crore to banks in today's repo auction. There are also MSS (market stabilisation schemes) auctions totalling Rs 6,500 crore (including T- bills) this week. So liquidity will tighten further. But RBI action will depend on where we stand at the end of the week," said a treasurer with a public sector bank.
Treasury officials are vary of intervention from the central bank, which could be compounded by dollar demand from importers, attracted by the current low dollar rates.
"There is probably a school of thought in North Block that believes that weakening the rupee could bring down inflation through cheaper imports. This may be true in economic theory but cannot be applied in the Indian context because of our high trade deficit," said the treasurer with the public sector bank.
Pressure from the exporter lobby may also force the RBI to curtail the rupee's gains. Big exporters like IT companies usually bear the brunt of the rupee's rise.
"Exporters are losing heavily. I have already lost Rs 30-35 lakh in the last 10-15 days. We had a meeting with the RBI last week where we told them this and requested that they clamp down on speculators in the forex market," said Ramu Deora, chairman of the Ficci trade facilitation forum.
The Apparel Export Promotion Council (AEPC) has also appealed to the government to halt the appreciation of the rupee.
Central banks of developing countries are finding strong capital flows a challenge to sustaining financial stability, Reserve Bank of India deputy governor Rakesh Mohan said in a speech at the International Monetary Fund in Washington on April 14.
The RBI meets next Tuesday to review its monetary policy, after hiking the key repo rate five times since June and the cash reserve ratio thrice since December. —With Bloomberg reports
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