After rupee crisis, Raghuram Rajan's RBI shores up currency's defences

May 20 2014, 15:54 IST
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Raghuram Rajan is reviewing exchange rate policy, three officials with knowledge of the matter said. (PTI) Raghuram Rajan is reviewing exchange rate policy, three officials with knowledge of the matter said. (PTI)
SummaryEven as money floods into India, Guv Raghuram Rajan-led RBI is bracing for the worst.

September, when the RBI defended the rupee aggressively by selling dollars, according to RBI data.

The RBI does not officially target a level for the rupee, but does step into the market to smooth volatility.

"The RBI maintains a foreign exchange reserve buffer that is commensurate with the needs of the Indian economy," the central bank said in an emailed response to a query by Reuters.


Meanwhile, an RBI committee is reviewing measures rolled out last year to stabilise the rupee, according to one of the officials. Those steps included currency swap concessions for banks raising money from abroad and a special dollar window to state oil companies.

The measures, along with finance ministry steps such as curbing gold imports, were widely credited with stopping the rupee rout.

Rajan, who took office at the RBI on Sept. 4, wants a list of options ready in the event that the rupee comes under pressure again, the person said.

Traders believe that in the event of another sell-down, the RBI would re-introduce curbs on trading on leverage. They also say it could take unprecedented steps such as intervening in non-deliverable forwards markets overseas through state banks.


The rupee has surged 18 percent since hitting a record low of 68.85 in August, far outperforming other emerging market currencies such as the Brazilian real and Indonesian rupiah.

The RBI is also wary of a sharp appreciation in the rupee, which might render the exchange rate less competitive for exporters, one of the officials said.

India's import cover - the amount of imports covered by reserves - stands at eight months, according to Bank of America-Merrill Lynch. That is the highest since October 2011 and up from about six months in the midst of the rupee crisis.

Dollar purchases have the added benefit of capping gains in the rupee, which the RBI sees as too strong in real effective exchange rate terms and not properly reflective of India's high inflation, the officials said.

David Loevinger, managing director of emerging markets at Los Angeles-based investment manager TCW Group, said the RBI does not need to add much more to its reserves.

India's once-wide current account deficit has narrowed since the government imposed curbs on gold imports last year, and its reserves are now about 1.7 times its deficit and external debt due in a year or less, he said.

By that measure, India now has the highest foreign exchange reserve cover among the group of countries

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