The Reserve Bank's signal is clear. If the market feels that the rupee should decline from Monday's level of around Rs 39.55 per US dollar, the Reserve Bank will not rush to shore it up. Reserve Bank governor Bimal Jalan made this clear when he said "I have no target....I am not saying RBI will defend the rupee at a certain level".

Indeed the Reserve Bank cannot announce a target rate, lest that triggers speculation.

On Tuesday, the market tested the waters by taking the rupee down by a few points. Perhaps the rupee will bounce back; perhaps not. But so long as the movement is smooth, the Reserve Bank will not intervene. This was the point Jalan sought to drive home when he asserted that the recent measures -- principally to siphon out excess liquidity -- had brought down volatility. He was even willing to roll back these measures.

Jalan was, however, less than clear when he said that from the "economic and technical point of view" the current level of the rupee was by and large reasonable. Perhaps, he was referring to the current rate as measured by REER. But there could be other benchmarks.

It may be that the current low rate of inflation is not sufficient for measuring the adequacy of recent exchange rate correction. If measured against export costs and prices of 1993, the rupee might need further correction. However, Jalan was by no means being dogmatic. He left the issue of depreciation/appreciation to the market. But changes in the rupee-dollar parity should be smooth.

All this by no means provides a lead to the thin Indian market: a small rise in demand for dollars depreciates the rupee even as a small increase in foreign currency inflow leads to an appreciation. But Jalan did take the market into confidence, so to say. Debt servicing payments of $2 billion, made through the market, have been completed.

The substantial pressure of excess demand for foreign currency is over. Future debt servicing payments of $800 million (in January-March) might be made without recourse to the market. More. The commercial banks had substantially reduced their oversold positions; and they have not been speculating. Thus, Jalan is confident of letting the rupee take its course. Sooner or later the demand for bank credit should pick-up; this will then reduce excess liquidity. The rupee could thus be left free to move in the market, even though the chances are that it will remain in a depreciating mode.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.