Millennium Post

‘Too strong Rs is undesirable, sparks disinflation impulse’

“The rupee has remained strong relative to peer countries. While an excessively strong rupee is undesirable, it too creates disinflationary impulses,” Rajan said in a statement announcing a cut in the interest rate.

“It bears repeating here that the Reserve Bank does not target a level for the exchange rate, nor does it have an overall target for foreign exchange reserves. It does intervene on occasion, in both directions, to reduce avoidable volatility in the exchange rate,” he said.

“Any reserve build-up is a residual consequence of such actions rather than a direct objective,” he added. The rupee has surged nearly 2 per cent this year, much more than compared to various Asian currencies.

The RBI has been intervening in the market at certain occasions to prevent the rupee from strengthening. Continuing its slide for the third straight session, the rupee on Tuesday fell by 5 paise to end at 61.92 against the dollar following sustained demand for the American currency from importers and a better dollar in overseas trades.

India’s foreign exchange reserves rose to $328.7 billion at the end of January 2015. Thus, it provides an “opportune time” to remove restrictions on gold imports.

The Economic Survey for 2014-15 said financial inflows in excess of the requirements have helped shore up foreign exchange reserves (USD 328.7 billion at the end of January 2015). They have helped lessen the vulnerability concern that led to serious stress last year.

Meanwhile, the rupee on Wednesday slipped by a hefty 33 paise — its fourth straight daily loss — to close at 62.25 against dollar after RBI Governor Raghuram Rajan’s comment that an “excessively strong rupee” is undesirable as it triggers disinflationary pressures. Heavy demand for the American currency also hit the local unit, which had earlier in the session hit one-month high of 61.67 after a surprise rate cut by RBI citing easing inflation pressures and steps taken by government to revive growth.

However, it suffered a setback on the back heavy dollar demand from importers and state-owned banks. The rupee plummeted to hit an intra-day low of 62.28 at the Interbank Foreign Exchange (Forex) market before ending at 62.25 per dollar — a fall of 33 paise (0.53 per cent).

“The rupee also depreciated after comments made from the RBI Governor that an excessively strong rupee is undesirable. This was contrasting to the statement made in the February meeting that the central bank was perfectly comfortable with the exchange rate,” said Admisi Forex, Director, Suresh Nair.

Additionally, we continue to see RBI build up reserves offered by strong inflows into India, Nair said, adding that this could also hurt sentiments.  The benchmark brent crude continued to trade above the $60 a barrel mark in global markets on Wednesday.

The dollar index (DXY), which measures the Greenback against a basket of six major currencies, was up by 0.29 per cent hit 95.74, its highest level since September 2003.
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