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RBI Changes its Stance on Rupee Swings

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The central bank has conspicuously taken a ‘hands-off’ approach on days the rupee fell
The Reserve Bank of India (RBI) appears to have changed its approach toward dealing with volatility in the currency markets. While the central bank’s stated position has been that it would step in to curb volatility, the RBI was conspicuous by its ‘handsoff’ approach on days the rupee fell precipitously. On the day the rupee plunged to a new record low in five years, the RBI only sold dollars modestly, unwilling to support the local unit when emergingmarket currencies faced a collective rout. “In the wake of the latest rupee depreciation, the RBI appears to be not as worried as it was in 2013,” said Anindya Banerjee, currency analyst at Kotak Securities.
“If the rupee is falling against the dollar in line with other emerging market currencies, it does not bother the central bank much as long as the decline is not exclusive to rupee.” Back in August 2013, the level of forex reserves were at about $275.5 billion compared with $400.1 billion now, show RBI data. “RBI’s reserves are enough, with an improving macro,” Banerjee said. The rupee, meanwhile, hit a new low at 70.40/$ on August 16. On August 13, when the rupee slid more than 1%, the RBI intervention was said to be muted. On the same day, all other emerging market currencies too bled, led by the Turkish lira that lost more than 40% this year.
“In the short to medium run, RBI has ample resources and policy instruments to manage INR volatility,” said Ananth Narayan, professor at SP Jain Institute of Management and Research (SPJIMR). “While it allowed 69.00 to break in the aftermath of the Turkey crisis, it has kept the market guessing on when and how it will intervene.” RBI’s intervention so far can be summed up as “do more, talk less,” he said. Earlier in the year, RBI is said to have defended the 69/$ level. RBI data released last week show that it sold $25 billion between April and June 2018. But market speculation is rife that the central bank has only intervened selectively.
On August 14 and 15, when the rupee crossed the psychological mark of 70/$, the RBI was suspected to have defended the level as other peer currencies did not fall. Instead, Turkish lira showed some signs of correction. “The intervention was more aggressive in 2013 amid a bunch of worries,” said KN Dey, founder of United Financials, a forex firm. “The quantum of fall was much sharper. The forex reserves level was much lower prompting the RBI to come out with strong measures under Raghuram Rajan.” Between April-end and August 28, the rupee slumped about 28% against the dollar in 2013. The latest data on RBI intervention are not yet available in August this year.
The Economic Times, 21st August 2018

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