What the RBI can do to stem Indian rupee slide

The Indian rupee on Thursday recovered from its all-time lows and was trading 32 paise up to 60.40 against the dollar in early trade at the Interbank Foreign Exchange market.

It had crashed by a whopping 106 paise on Wednesday to close at a historic low of 60.72 against the dollar as a hesitant RBI failed to stem the slide.

Mail Today reports the rupee fell swiftly on Wednesday due to the month-end surge in dollar demand from importers and a feeble attempt by the RBI to sell dollars to prop up the rupee turned out to be a classic case of too little, too late.

The RBI has a foreign exchange war chest of $ 291 billion that it could use judiciously for sterilized intervention in the market to control the volatility of the rupee.

This would entail selling the dollars when the rupee falls and at the same time not allowing the money supply in the economy to go up which would cause inflation. However, an over cautious RBI has been holding back from doing this.

" The RBI now needs to come out with administrative strictures to cut speculation, curb excessive import/ foreign currency loan hedges and take oil imports out of the market," said Moses Harding, head of asset liability management at IndusInd Bank in Mumbai.

Special window
A senior public sector oil company official told Mail Today that "the RBI should open a special window for the oil companies and sell them dollars directly at a reference rate. This has been done successfully in the past to strengthen the rupee and there is no reason why it shouldn't be done now when the rupee has hit an all-time low.'' The RBI also needs to order banks to cut speculative trades as it had done in December 2011 when it had ordered them to reduce their intraday net open positions by 50- 75 per cent.

This time around it appears to be much slower in its response despite the rupee having plunged much lower .

The problems are being compounded by perceptions that the RBI is not being able to defend the rupee. Statements issued by the finance ministry that the slide in the rupee is temporary and it would stabilise on its own have not helped to revive market confidence either.

"The real fact is that the market has attempted to take on the RBI by adding the pressure to intervene and to identify how much resolve the RBI has to defend the 60 level. The rupee slumped once the central bank was unable to defend it," said Suresh Kumar Ramanathan, a foreign exchange strategist at IMB Investment Bank in Kuala Lumpur.

The rupee fell 1.8 per cent for the day, faring far worse than other Asian currencies and has depreciated by as much as 11.3 per cent since the beginning of May. The rupee has now breached the previous low of 59.99 hit on June 20 and had closed at 59.63 on Tuesday.

With inputs from Mail Today