In 45 days, RBI comments accelerate dip in rupee

In the space of less than two months the rupee has dipped on four

occasions on the back of comments from the Reserve Bank of India. This

is significant considering the rupee has been falling for nine

straight weeks in any case after the US Federal Reserve began a series

of announcements that it will be gradually withdrawing from the

stimulus but the comments have accelerated the fall.



The latest was on Thursday last week when the RBI Governor D Subbarao

said "we do not have an exchange rate target" for the rupee. As the

chart shows the dips have been sharp, but what is of concern is that

the comments have exacerbated the degree of drop. All through this

period the foreign institutional investors have consistently withdrawn

money leading to more concerns that the high current account deficit

will be more difficult to finance.



According to data compiled by India Forex Advisors, after Subbarao's

comments on Thursday, the rupee for instance depreciated from 59.90

levels to 60.40 level against the dollar on Thursday. "The markets

were expecting the RBI to calm nerves of investors and prevent further

depreciation, but the comments failed to do so," said an analyst

requesting anonymity.



Similarly, when the RBI chose to leave policy rates unchanged in its

mid-quarter monetary policy review on June 17, the rupee initially

appreciated. But later during the day, it started weakening after RBI

concerns on inflation and current account deficit was read in detail

by the markets. The rupee fell from 57.60 levels to 58.10 levels to

the dollar.



"It is only a durable receding of inflation that will open up the

space for monetary policy to continue to address risks to growth," the

RBI said in its mid quarter policy review (see chart). Currency

markets are naturally expectation driven and such volatility does add

to the movements, analysts agreed.

The comments have come around the same time when the finance ministry,

especially its chief economic advisor Raghuram Rajan have attempted to

go the other way, instilling confidence in the rupee through detailed

press briefings on more than one occasion.



For instance just two days after the RBI mid quarter review's hawkish

tone, Rajan on June 20 said the government is not short of options to

tackle the fall of the rupee. He also said the RBI will take action to

support the rupee as appropriate.



Because of the sensitive nature of the topic analysts were unwilling

to come on record. "It's a tricky relationship. The RBI's comments, be

it on interest rates or inflation, always has the ability to move

markets," said an analyst.