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RBI stays on sideline as rupee hits 20-month low

May 13, 2015 12:30 IST

Traders believe the RBI will step in more strongly, if the rupee starts falling towards 65

The Reserve Bank of India's limited intervention during the rupee's slide to 20-month lows against the dollar shows it welcomes a weaker currency and wants to save ammunition in case volatility worsens once US interest rates rise, according to dealers.

They estimated that the central bank spent only $2 billion to $3 billion on intervention last week as the rupee weakened past the 64 rupees to the dollar, its lowest since September 2013.

On Wednesday the rupee was still lingering at 64.2 per dollar, though the traders reckoned the RBI spent an addition $500 million the previous day.

"Last month the base was 61-63, now we expect the base to be 62-64 for the rupee," said N S Venkatesh, executive director at IDBI Bank in Mumbai.

Traders believe the RBI will step in more strongly, if the rupee starts falling towards 65, given that could have an inflationary impact by making imports such as oil costlier.

The RBI says it does not target a specific level for the rupee, though it usually steps in to smooth out volatility.

Yet Governor Raghuram Rajan warned in March that an "excessively strong" rupee would be "undesirable".

The rupee had, until late February, proved resilient to a dollar that was appreciating sharply against other major currencies, leaving exporters complaining over a loss of competitiveness.

During the past month, the rupee came under more pressure as foreign investors sold heavily, worried by slow progress in India's reforms, a high-profile tax row and also volatility in global markets.

The rupee is now down 3.8 percent since the end of February, well off its 2015 high of 61.29 hit in January, and following other emerging market currencies lower.

Earlier this year, the rupee's real effective exchange rate (REER) - calculated on a trade-weighted basis against a basket of 36 currencies and adjusted for inflation - rose above 112 for only the second time since the data series began in 2004.

Last month the rupee's REER value fell back to 111.70, having gone as high as 113.2 in March.

"It's no-brainer, we all knew the rupee is overvalued. So it was a matter of time before it went," said Ashish Vaidya, head of trading, asset liability management at DBS in Mumbai.

Having amassed a record $351.87 billion in reserves, traders believe the RBI is building defences for when U.S. rates go up, to protect against any repetition of a sell-off that saw the rupee drop to a record low of 68.85 in August 2013.

"If you see the speculative flows coming in to the market, then we will see an aggressive stance from the RBI," said a senior bank dealer.

Neha Dasgupta and Suvashree Choudhury in Mumbai
Source: REUTERS
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