Can RBI Save the Drowning Indian Rupee?
By siliconindia   |   Friday, 25 November 2011, 01:04 IST   |    7 Comments
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Can RBI Save the Drowning Indian Rupee?
Bangalore: One of the constant debates since the fall of the Indian rupee is- who can save the Indian rupee? The government nudges RBI and says, "You are our hero" and RBI comes zooming in like a superman and saves the Indian rupee with its intervention for the second day in a row following the Indian currency's slide to a record this week. Finance Minister Pranab Mukherjee said: "RBI intervention [in the foreign exchange market] will not help "The increased uncertainty in the Eurozone on account of the sovereign debt crisis has led to shifting of capital from Europe to the U.S. which has hardened the U.S. dollar against most currencies." as quoted by The Hindu. Previously, RBI was not sure when they would be intervening as RBI described the rupee fall as "disruptive", and they said that they would only intervene when the market becomes excessively volatile. RBI proved that the government can still rely on them. Citibank estimated that RBI likely sold $3 billion in intervention on Wednesday. "The central bank is likely to have sold dollars today in early trade as well. There was major selling by state-run banks followed by corporates which pulled the rupee back up," a senior dealer with a state-run bank said as quoted by ET. After the intervention of RBI the rupee took a breath of relief to 52.20/21 per dollar, stronger than Wednesday's close of 52.36/37. The rupee had previously skidded to 52.73 on Tuesday. But the question of demand and supply is still not at rest says Ashtosh Raina, head of foreign exchange trading at HDFC Bank as according to him, the rupee recovery was all sentiment driven. RBI holds about $300 billion as foreign exchange reserves. To tame the falling rupee, RBI also raised the interest rates for deposits held by overseas Indians in both rupee and foreign currency. It has also eased the overseas borrowing rules for local corporates by raising the ceiling for the interest that the firms can pay. For example, companies that are borrowing abroad can now pay as much as 3.5 percentage points over the London Interbank Offered Rate for loans longer than three years and up to five years. The other issue that RBI is currently addressing is the inflation that has crippled the Indian economy. RBI is trying the curb inflation from reaching a double digit mark. RBI implemented more than a dozen rate hikes which eventually failed to cool down the price pressures. Inflation rate has remained above the 9 percent mark since December last year. Latest data show WPI inflation was 9.73 percent in October, compared with 9.72 pervious in the previous month. On the other hand, Rupee depreciation has already started to push up prices in some sectors like automobile, consumer goods, and mobile phones. For instance, makers of consumer durables have raised product prices by up to 10 percent, as their import costs have gone up because of the rupee's depreciation. RBI will have to strike a balance between boosting economic expansion and bringing down price pressure. "Going forward, I am sure the RBI takes into account the important concern of balancing the targets of controlling inflation and keeping up growth and employment generation," Pranab Mukerjee said. Although the Indian government has its fingers crossed on RBI, though RBI would not be able to arrest the slide, mainly because the crux of the problem lay in the pull-out of funds by foreign institutional investors (FIIs), triggered by the Eurozone sovereign debt crisis and the uncertain global economic environment.