Intervention difficult when currency depreciates sharply: RBI

India Infoline News Service | Mumbai |

Any sharp depreciation in the exchange rate is likely to see large scale capital exodus by the short-term investors, RBI deputy governor Harun Khan says

The proximate problem that a central bank faces is maintaining a reasonably stable exchange rate, a variable that captures not only the external sector imbalances but also the future expectations of the relevant fundamentals, Harun R Khan, Deputy Governor, Reserve Bank of India.

Speaking at the 9th Annual Conference of FEDAI in Cape Town on April 12, 2014, Khan said, Any sharp depreciation in the exchange rate is likely to see large scale capital exodus by the short-term investors before the value of their investment is further eroded.
The problem of an appreciating currency in the face of surging capital inflows poses a separate set of problems, principal amongst which is loss of export competitiveness.

The most obvious tool for dealing with heightened volatility or sharp movement either way is the central bank’s intervention operations. For instance, in the face of sharp appreciation, the intervention is directed at mopping up the excess supply of foreign currency in order to preserve export competitiveness. Such operations do have monetary implications and steps to neutralize these involve a cost. Intervention in the face of sharp depreciation is a difficult choice for several reasons, including loss of reserves, particularly in India where the external liabilities far exceed the official reserves.

The Rupee had exhibited relative stability after the post-Lehman volatility of 2009 and traded in a narrow band during most of 2010 and 2011. The volatility started in the second half of 2011 on the wake of US downgrade and related problems. Since then we have had three different spates of volatility: end-July 2011 to mid-December 2011 (about 18% depreciation of INR against USD), end-February 2012 to end-June 2012 (about 12%) and end-April to end-August 2013 (about 19%).

"The importance of a sufficiently large kitty of official reserves to deal with sudden flow reversals has been underscored time and again. In fact, the large reserves that many emerging market economies have built up post Asian crisis is often viewed as a bulwark against contagion effects of global crises and risk aversion," Khan said.

"Therefore, accumulation of reserves as an objective by itself rather than a by product of market actions of the central bank to stabilise the exchange rate is a theme that cannot be dismissed out of hand, more so when there is no assured and easy access to any collective insurance for emerging market economies like India," he added.
 

Advertisements

  • Save upto Rs.2.67 lakh with Pradhan Mantri Awas Yojana ...Know more
  • Now Save Rs.3150 on your Demat Account ...Click here
  • Now get IIFL Personal Loan in just 8* hours...APPLY NOW!
  • Get the most detailed result analysis on the web - Real Fast!
  • Actionable & Award-Winning Research on 500 Listed Indian Companies.