In 45 days,RBI comments accelerate dip in Indian rupee

In 45 days,RBI comments accelerate dip in Indian rupee

Rupee has been falling for 9 straight weeks after US Federal Reserve's announcements on stimulus.

In the space of less than two months the Indian rupee has dipped on four occasions on the back of comments from the Reserve Bank of India. This is significant considering the rupee has been falling for nine straight weeks in any case after the US Federal Reserve began a series of announcements that it will be gradually withdrawing from the stimulus but the comments have accelerated the fall. RBI top post: Saumitra Chaudhuri frontrunner

The latest was on Thursday last week when the RBI Governor D Subbarao said “we do not have an exchange rate target” for the rupee. As the chart shows the dips have been sharp,but what is of concern is that the comments have exacerbated the degree of drop. All through this period the foreign institutional investors have consistently withdrawn money leading to more concerns that the high current account deficit will be more difficult to finance.

According to data compiled by India Forex Advisors,after Subbarao’s comments on Thursday,the rupee for instance depreciated from 59.90 levels to 60.40 level against the dollar on Thursday. “The markets were expecting the RBI to calm nerves of investors and prevent further depreciation,but the comments failed to do so,” said an analyst requesting anonymity.

Similarly,when the RBI chose to leave policy rates unchanged in its mid-quarter monetary policy review on June 17,the rupee initially appreciated. But later during the day,it started weakening after RBI concerns on inflation and current account deficit was read in detail by the markets. The rupee fell from 57.60 levels to 58.10 levels to the dollar.


“It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth,” the RBI said in its mid quarter policy review (see chart). Currency markets are naturally expectation driven and such volatility does add to the movements,analysts agreed.

The comments have come around the same time when the finance ministry,especially its chief economic advisor Raghuram Rajan have attempted to go the other way,instilling confidence in the rupee through detailed press briefings on more than one occasion.

For instance just two days after the RBI mid quarter review’s hawkish tone,Rajan on June 20 said the government is not short of options to tackle the fall of the rupee. He also said the RBI will take action to support the rupee as appropriate.

Because of the sensitive nature of the topic analysts were unwilling to come on record. “It’s a tricky relationship. The RBI’s comments,be it on interest rates or inflation,always has the ability to move markets,” said an analyst.