Saturday, June 9, 2012

RBI interventions are not enough to shore up the rupee

Beyondbrics points to a nice graphic from Kotak Mahindra Research team that highlights the RBI's relative reluctance to inetrvene in the forex markets over the past three years, compared to its aggressive actions during 2007-08 when rupee was on the ascendancy.

In recent months, stung by the sharp depreciation in the value of rupee, the RBI has shown much greater willingness to intervene in the financial markets. The central bank is estimated to have sold roughly $20bn worth dollars to prop up the rupee in 2011-12 fiscal. In addition it has announced several other measures like ordering exporters to immediately sell half their foreign currency earnings instead of retaining them outside the country, selling dollars directly to oil importers in exchange for bonds, permitting foreign retail investors to buy Indian corporate bonds upto a limit of $1 bn, and increasing the investment limit for FIIs in government securities and corporate bonds by $5 bn each to $15 bn and $20 bn respectively.

However, all these are at best palliatives. As I have blogged earlier, the cure lies elsewhere.

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