Exporters ask RBI to Rein in Rupee’s Climb.

MUMBAI: With the partially-convertible Indian rupee touching a record 6-month high of 44.38 against the dollar, the chorus from exporters demanding intervention by RBI is getting louder.

A section of trade is worried whether India can be a mute spectator in the ongoing currency war where major economies such as China, Brazil, South Korea and Switzerland rush to devalue their currencies to remain competitive.

“RBI must intervene now. After all, it is the matter of protecting jobs in the country. There are about 12 million employed in the apparel exports sector and another 12 million in the other export industries. The rupee appreciation has made exports uncompetitive and are flooding the markets with cheap imports,” said Prameel Udani, chairman, Apparel Export Promotion Council .

But for RBI, the course is not all that clear cut. A stronger rupee is helping its war on inflation and intervention could unleash a flood of liquidity that would either stoke prices further or would require sterilisation that would worsen the fiscal deficit.

Besides the concern over jobs in the export sector, the big question is how sustainable are the flows? Unlike countries engaged in the currency war which have a trade surplus, India has a large current account deficit. Even a slowdown in forex inflows could increase volatility. So far the volatility has been on the upswing. The domestic currency which hardly budged when the Sensex rose from 18,000 to 19,000 has gained almost `2 in the next 1,000 point rally. The fear is that a reversal could be equally sharp.

“At the moment, there is a huge currency play. Money is expected to flow in because of higher yields in India and also because mega IPOs like that of Coal India could draw $2-3 billion of dollar inflows. Investments by foreign institutional investors during the current fiscal have touched $20.52 billion.

But economists feel that by allowing the rupee to appreciate, RBI has tacitly accepted the domestic currency trading in a higher band vis-à-vis the dollar “The fact that RBI hasn’t intervened so far implies that it is fairly comfortable with the current exchange rate level. This to my mind is based on a slightly longer-term view (i.e. up to march 2011),” said CARE chief economist Madan Sabnavis.

According to Mr Sabnavis, RBI might have decided to wait and watch because the current account deficit would widen to 3.5% of GDP  a gap that will have to be filled by capital flows. He also said the current state of FII inflow may be transient in nature and will tend to slow down or reverse by November or December when they close their accounts.

Source : economictimes.indiatimes.com