India Central Bank's ‘Desperate’ Push to Prop Up Rupee

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The Reserve Bank of India’s intervention in the currency market on Thursday is being viewed by some market watchers as a desperate move to prop up the currency in the absence of government policies to boost sentiment among foreign investors.


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“It is a reflection of a certain desperation from the side of the Reserve bank of India (RBI) when the government is not doing anything,” Rajeev Malik, senior economist, CLSA told CNBC.

On Thursday the RBI said exporters will have to sell half the foreign currency in their accounts in an attempt to strengthen the rupee after it ended the previous day at a record low against the dollar. The new regulation will require sales of about $2.5 billion in foreign exchange.

Malik said the move was like “applying balm” rather than fixing the underlying problem, which is a reliance on foreign investment flows to fill a ballooning current account deficit.

The country’s current account deficit is estimated to be 4 percent of gross domestic product and the government is also grappling with a growing budget deficit, which touched 5.9 percent of GDP for the year-ended March 31.

Confusion about government policies have hurt investor appetite and led to the recent devaluation of the rupee [INR=  53.15    -0.10  (-0.19%)   ], which has fallen over 19 percent in the past 12 months, experts told CNBC.

“It is a precarious situation. The RBI had to slow the rupee’s weakness, but its move today will only provide short-term respite as the structural issues like fiscal deficit, etc have not been addressed,” Stuart Oakley, head of emerging markets forex trading at RBS, said.


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He added that the central bank will run out of things to do very soon if the real issues of slowing growth and policy inaction are not solved.

India is expected to post growth of about 7 percent in the year ended March 31, the slowest rate in two years. The government has been baffling investors with several policy flip-flops. Last year the government cleared and then stalled foreign direct investment in multibrand retailing and early this week, it postponed by a year the implementation of new rules cracking down on tax avoidance.

Dariusz Kowalczyk, strategist at Credit Agricole, wrote in a report soon after the RBI intervention that the move reflected policy makers' desperation as a sharply falling currency was “adding to inflationary pressures and discouraging foreign investors needed to plug the current account gap.”

Soon after the RBI announcement, the rupee firmed by about 1.2 percent against the greenback, but analysts don’t expect any lasting impact from these measures. Malik sees it as a “one-off” boost for the rupee, while Kowalczyk who has a buy call on the rupee sees limited upside given the “frequent policy changes on foreign investment.”

Vivek Rajpal, Strategist, India fixed Income at Nomura Financial Advisory, thinks that the RBI’s move will give the rupee a “meaningful reprieve” but only in the near-term. He expects the central bank to continue supporting the currency at current levels in the range of 52 to 54 rupees against the dollar.

© 2012 CNBC.com


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