Reserve bank intervenes to halt Indian rupee free fall

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An Indian man counts currency notes in front of the Reserve Bank of India in Gauhati, India. The Indian rupee plunged to an all time low against the dollar Tuesday as global demand for dollars and India's darkening economic picture swamped out central bank efforts to staunch the decline. Photo - Anupam Nath/AP

Indian rupee’s free fall came to a pause Thursday as companies sold dollars following a Reserve Bank of India (RBI) intervention for the second consecutive day.

“The rupee’s recovery today is all sentiment driven. But we need to watch out for the actual demand and supply,” Reuters quoted Ashtosh Raina, head of foreign exchange trading atHDFC Bank, as saying.

The German auctions results triggered heavy selling of the euro and shares, which lead to a sell-off in the rupee as well, he added. He explained that heavy demand for dollars for all counters and continuous bids emerging have driven up the demand for the greenback at the cost of Indian rupee. “So the outlook now really depends on the central banks stand, the banker declared.

The rupee opened strongly on Thursday at 52.20 per US$, improving Wednesday’s close of 52.36. The currency hit an all-time low on Tuesday after reaching a low.

RBI MEASURES

The Indian central bank took strong measures on Wednesday to stem the tide of declining rupee by raising the interest rate ceiling on deposits held by overseas Indians in both local and foreign currencies. Citing volatile market conditions as a pretext, RBI also eased overseas borrowing rules for Indian corporations by raising the interest ceiling the firms can pay.

Analysts believe the central bank is currently sitting on an estimated $300 billion in foreign exchange reserves and is taking aggressive intervention measures to counter growing volatility and economic instability. A senior dealer at a state-run bank told Reuters the central bank is likely to have sold dollars in early trade to shore up the flagging Indian rupee. “There was major selling by state-run banks followed by corporations which pulled the rupee back up,” the executive added on condition of anonymity.

RBI governor Duvvuri Subbarao refused to comment if the central bank had intervened in the forex market. However, Subir Gokarn, the bank’s deputy governor, said RBI will intervene to ensure smooth and brisk rupee movement and prevent downward spiral in its value.The response is really…trying to remove sharp movements. That is the kind of technical and judgement criteria we used when we decided to intervene but that has not been with the objective of targeting a rate, he said adding that the institution had no specific exchange rate on its agenda while issuing market directives.

PROS AND CONS

A devalued rupee means Indian exports, especially its much-vaunted IT softwares, give them an edge in international market over exports from other countries but constant erosion of currency is bad news for investors and buyers. The Indian rupee has lost nearly 17 per cent of its value since it reached its highest in late July this year amid declining fortunes of US dollar.

If the change is gradual we can manage, but if the change happens at the end of the quarter, either way, we will have a big shift. We will not have the time to adjust, Infosys chief executive SD Shibulal said. He added that Indian IT companies may also not be in a position to reap full benefits of a strong dollar as many of them hedge their positions against forex fluctuations.

Sources: Agencies

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