If not for the Reserve Bank of India's four-month absence from the rupee market, it would have been difficult to notice authorities have slowly allowed larger gyrations in the currency and minimised their interference.
The RBI did not intervene in the rupee market from December 2009 to March this year -- their longest hiatus since mid-2006.
Their limited interventions in April also suggest that the central bank is inclined to step in these days only when the rupee moves a percent in any direction on any day, unlike in the past when a 0.2 percent move could prompt intervention.
Below are questions and answers on the Reserve Bank of India's currency policy, based on discussions with three central bank officials who could not be identified by name.
Has The RBI Changed Its FX Stance?
It's a subtle shift, discernible merely in the threshold for intervention. The central bank says it intervenes to smooth out volatility and it is not uniquely concerned with the level of the rupee or whether it is weakening or strengthening.
The central bank takes into account factors including the dollar's performance against global majors, movement of Asian currencies and India's monetary policy when assessing rupee volatility.
Central bank officials say they will only intervene if the rupee's movement is not based on fundamentals but mostly on speculation.
In the current context, when the market is uncertain over possible contagion from Greece, rupee volatility has been in line with Asian peers and the dollar's moves against the majors, and has thus not merited any strong intervention, RBI officials say.
For instance, on Feb. 5, the central bank stayed on the sidelines, even as the Indian unit dropped by 1 percent, because that was in line with the euro's fall to its lowest level since May 2009.
Has The RBI's Tolerance For Rupee Volatility Increased?
On the surface, yes.
In 2006, the central bank intervened in currency markets when intraday movement was as moderate as 10 paise, or one-tenth of a rupee.
But its tolerance for volatility started to increase from 2008 when the global financial crisis roiled markets. It intervened regularly in the forex markets in 2008 and 2009, but it allowed for far greater fluctuation in the rupee before stepping in.
That the central bank was allowing volatility was confirmed when it kept to the sidelines from December through March despite strong capital inflows which pushed the rupee higher and caused intra-day movement of as much as 0.9 percent. It only intervened on two days, one in April and the other in May, traders said.
Intervention data for April is not yet available.
The rupee rose between December and March by 3.6 percent as robust $6.6 billion in portfolio capital flowed into the economy, more than a third of the total $17.5 billion seen in all of 2009.
But RBI officials said the currency's movements weren't exceptionally volatile and healthy market forces had generated the wider trading range.
The rupee touched a record low of 52.2 per dollar in early March 2009, and since then has gained 15.5 percent. It currently trades at 45.2 to the dollar.
The central bank sold a net $5.8 billion in 2009 to support the rupee during the downturn, helping it notch up a gain that year of 4.7 percent.
In early May, the RBI is suspected by traders to have sold dollars when the rupee dropped on a single day by 1.2 percent, suggesting the central bank may enter the market when moves are of such magnitude.
What Could Trigger Intervention In The Months Ahead?
Foreign investors continued to flock to India in April, but they pulled money out in early May as the euro zone debt crisis forced investors to cut risk.
That said, besides extreme volatility, a sudden surge in capital inflows could prompt intervention. The RBI keeps a close watch on the quality of capital flows, wary of speculative and short-term flows.
If capital inflows threaten to overwhelm the current account deficit, the central bank might step in for fear of a build up in inflationary pressures.
However, there is no specific level of flows that would trigger a move.
What About The Real Value Of The Rupee?
Probably does not matter. The rupee has risen 25 percent in real trade-weighted terms from its record low in March 2009, without causing concern at the central bank.
The Real Effective Exchange Rate (REER) of the rupee has risen to 113.56 in March from 105.81 in November, reflecting the extent of overvaluation of the rupee against six major currencies.
Latest data suggests further real appreciation of the rupee with the REER at 116.17 on April 16.
No comments:
Post a Comment