Hands-Off Policy on Rupee Course.

New Delhi, :  India is keeping a close watch on the rupee course but is unlikely to join a currency war being waged in forex trading rooms across the globe to protect export markets.

Though the RBI had intervened in recent times to check the rupee rise against the dollar, top finance ministry officials said, “this is an exception rather than rule”.

The rupee closed at 44.35 against the dollar today.

“Our understanding is clear, India will check volatility and yet allow market forces to work,” they said.

Though, in theory, the exchange rate of the rupee is market determined, in reality it can be propped up or allowed to fall in a calibrated manner by the Reserve Bank in consonance with government policies.

Top finance ministry officials said the rupee rise would be checked gradually by state-run banks and the central bank but no official statements would be made on this issue.

However, most Asian nations, including Japan, have been actively intervening in the foreign exchange market to stem the appreciation of their currencies vis-à-vis other currencies. China, whose currency value is tightly controlled, does not let its yuan appreciate to its real value in the market.

Officials say this means India’s export competitiveness will take a hit. “Major players in the IT sector such as Infosys want intervention in the forex market. We agree there is a need for some intervention but we do not want that to be a religious credo,” they said.

On the back of huge foreign investment flows into the country’s stock market, India’s foreign exchange reserves have gone up by $1.63 billion to $295.79 billion because of a healthy jump in foreign currency assets. During the first six months of the current fiscal, FII inflows on a cumulative basis have crossed $29 billion.

India does not favour curbing these flows through taxes or any policy steps at this stage. Finance minister Pranab Mukherjee had recently told reporters, “I do not think there is a need to cap capital inflows right now.”

Officials said, “While every country would work to protect its exports, one has to realise that unless the dollar weakens in relative terms the global economic slowdown will not end.”

However, one reason why the finance ministry does not favour a protectionist stance on the rupee is that a relatively strong local currency will help buy more oil at a cheaper rate. India imports three fourths of its petroleum requirement.

Officials said for every rupee appreciation in the rupee-dollar valuation, the oil import bill goes down in rupee terms by Rs 5,200 crore.
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Source : telegraphindia.com