NEW DELHI, Nov 27: Reserve Bank of India governor Bimal Jalan met Union finance minister P Chidambaram on Thursday to chalk out a fresh exchange-rate management strategy in the light of the sharp depreciation of the rupee against the dollar. Finance secretary Montek Singh Ahluwalia was also present at the meeting.

This is the first meeting that Jalan has had with North Block officials after he took charge as the central bank governor.

Finance ministry sources said that there was apparently a consensus in the meeting that the present level of the rupee was appropriate in the light of the economic circumstances prevailing within and outside the country. The central bank is now expected to "maintain" the exchange rate parity "in and around levels that are existing today".

Sources said the central bank would continue with its intervention to curb excessive volatility and protect the currency from a further fall.

The ministry had earlier been opposed to a sharp depreciation of the rupee in the context of strong economic fundamentals, which include a low current-account deficit.

The feeling now is that the sharp and inexorable depreciation in the value of Asian currencies has made domestic exports lose some of their comparative advantage in the world markets and, therefore, there was some room for "correction" of the kind which had been noticed in the last few weeks.

The ministry, however, made it clear that it was not in favour of the kind of sharp devaluation of the rupee witnessed in the last few days as it was sending out wrong signals to the market. "The devaluation should be conducted in a planned and orderly manner, and the central bank should ensure a soft landing of the currency," sources said.

The ministry is reported to have scoffed at the RBI for its failure to prevent a further fall of the rupee, especially as the opposition had taken advantage of the situation to castigate the United Front government on this account.

The meeting also decided on strong action against any irregularities by speculators who have virtually taken over the market. The central bank's inspectors have already been sent out to inspect dealing rooms of eight big market-makers. Punitive and exemplary action is likely in case defaults in conduct of transactions are detected.

Legal and institutional measures to curb speculative forces also came up for discussion in the meeting, sources said.

Our Mumbai Bureau adds: The rupee closed at 38.55/60 against the dollar on Thursday, unchanged from the closing level of Wednesday, on the back of Reserve Bank of India's continued intervention in the forward and spot markets. The intra-day low was 36.65. The central bank maintained the closing rate at 4 pm was 38.45/55. "Our intervention in the spot market was marginal," an RBI spokesperson said.

Dealers said the rupee weakened considerably after 4 pm to touch a low of 38.62, two paise lower than Wednesday's closing level. "We expect the rupee to touch 38.75 on Friday as there is an underlying demand for dollars," a dealer with a private bank said.

The central bank intervened in the spot market to pump in about $40 million to stem the rupee's slide. Its presence in the forward dollar market was through swap transactions and outright forward-dollar sales. The intervention pushed premiums down by around 10 paise across maturities beyond three months.

Commerce minister BB Ramaiah said in Delhi the rupee would take its own course. "Right now what is happening is due to political reasons...Political uncertainty is affecting the economy, including stock markets," he said.The minister said he was optimistic about the export growth for October. "I hope October exports will be better than September," he added.

When asked whether the RBI should continue to intervene to stabilise the rupee, he said: "It is up to the RBI and the finance ministry."

The rupee see-sawed through out the day marked by unabated volatility.Opening at around 38.52/53, it strengthened to 38.35/38 as some exporters entered the market to sell dollars and on the RBI sending auditors to forex-dealing rooms of eight banks.

The RBI move triggered a dollar sell-off in early morning trade. Some dealers said the impact of RBI's moves would be temporary as any speculative dollar-buying was piggy-riding on the back of genuine spurt in corporate dollar-demand.

"Steady corporate demand came in as some banks bought dollars on behalf of their public sector unit clients. This saw the rupee slide once again to touch a new low of 38.65," a dealer said. He said the RBI came in at this point and sold spot dollars, which drove the rupee down 38.45 levels, but once again lost ground to close at 38.55/60 levels.

Dealers said the commerce minister's statement would weaken the currency further. "However, the rupee continues to wait for a statement from the new governor Bimal Jalan about the rupee," a chief dealer in an European-based bank said.

The forwards continued to soften on Thursday as the RBI continued to conduct swaps across all maturities. Six-month (annualised) forwards closed at 5.95 per cent down from six per cent on Wednesday.

LIC investments

The state-run Life Insurance Corporation's plan to infuse around Rs 3,500 crore in the market is set to give a big push to the moribund capital markets.The move follows the finance ministry's decision to allow the corporation expand its capital market exposure by 20 per cent. In absolute terms, LIC's exposure in the capital market will now go up to Rs 19,000 crore.

Chairman G Krishnamurthy said the new norms announced by the finance ministry stipulating that LIC can now invest 60 per cent of its special group-insurance funds in the approved market investments will augment the total fund size in the category.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.