India’s central bank sees the rupee as moving toward its fair value and will step in to sell dollars from its reserves when it assesses a genuine shortfall, according to people familiar with the matter.
The rupee’s drop to a record low of 80 a dollar reflects demand and supply dynamics, the people said, asking not to be identified sharing private deliberations.
India’s rupee has weakened about 7% this year, roughly middle-of-the-pack among Asian peers as the dollar strengthens globally. Some gauges assess the currency as overvalued; the central bank had said to be intervening aggressively in recent months as authorities were wary of letting the exchange rate slip to levels where imports become extremely expensive.
Waning commodity prices could contain a record trade deficit and allow the rupee to depreciate in a stable manner. The Reserve Bank of India’s stated policy is to prevent volatility in the foreign-exchange market.
Nearly $30 billion has flowed out of India’s equity markets this year and the nation’s current account deficit has widened. The RBI has sold a net $16 billion to defend the rupee this year through May in the spot market and depleted its forward dollar book by another $16 billion in the two months through May, central bank data showed.
The 40-currency real effective exchange rate, which shows the currency’s competitiveness against a basket of its trading partners, stood at 104.18 in June as against 104.78 in the earlier month. A value over 100 signals overvaluation.
The RBI will likely follow a strategy of keeping the real-effective exchange rate relatively stable, Citigroup economists Samiran Chakraborty and Baqar Zaidi wrote in a note this week. “USD/INR’s move beyond 81 levels could possibly take REER below 101-102 levels, which RBI might want to avoid,” they wrote.
Source Name:-Economic Times