RBI intervenes as rupee slides to new low

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New Delhi: Under pressure from the global financial uncertainty and weak domestic economic data, the Indian rupee sank to a record low for the fourth straight day on Thursday, hitting 54.30 against the dollar, but recovered later as the central bank intervened.

As the rupee fell to another low, the Reserve Bank of India (RBI) nudged state-owned banks to sell dollars. However, the quantum of intervention is not known.

The continuing slide has pushed importers and investors to buy the US currency amid speculation of further capital outflows and raised concerns that it may hit profitability of many firms.

The Indian currency recovered from the low and closed the day at 53.71 a dollar. The Indian currency has weakened over 20 per cent against the dollar since the beginning of 2011.

It had closed at 53.88 to a dollar on Wednesday.

Finance Minister Pranab Mukherjee had blamed the huge capital outflow for the recent slide in rupee.

“While the Indian economy faced excessive capital inflows in the aftermath of the global crisis leading to appreciation of the domestic currency, with the unfolding of the eurozone crisis, the matter of concern at present is reversal in such flows leading to increased currency volatility,” Mukherjee said.

Foreign institutional investors, in fact, sold stocks worth $91.66 million on Wednesday and over $10 million on Thursday, according to data available with the Securities and Exchange Board of India (SEBI). Traders expect the rupee to depreciate further to about 54-56 rupees to a dollar in the near term.

Before Thursday, the RBI had not made any significant intervention in the currency market in December to control the slide of the rupee like it did in September and October.

But the apex bank said it would make a ‘definitive statement’ on the rupee at the mid-quarter monetary policy review on Friday.

According to data available with the central bank, the RBI had sold dollars worth $845 million and $943 million in September and October, respectively, to support the currency.

C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council and a former RBI governor, said the central bank could intervene to combat fluctuations in the currency if the factors affecting it were from within the country.

A depreciating rupee makes imports costlier and has a major impact on the country’s oil bill by putting pressure on retailers to hike prices of at least de-regulated fuels like petrol and the aviation turbine fuel. This adds to the inflationary pressures.

Many of the country’s import-dependent sectors will see costs going up if the rupee does not stabilise in the near future.

Policymakers will also have to contend with India’s widening current account deficit, which is the difference between a country’s imports of goods, services and its exports, in managing the currency.

In the past four months the gap between imports started far outweighing exports. The current account deficit has widened to over 3 per cent of the gross domestic product.