Jalan said on Thursday, "The RBI will continue to intervene directly or indirectly in the market to meet the temporary demand and supply mis-matches. It will also directly meet partially or fully, without entering the market, the foreign exchange requirements for import of crude oil by the Indian Oil Corporation and for the government debt service payments, as considered necessary."

The governor's statement came after trading hours on a day when the rupee went to a new low of 45.45/46 to the dollar after opening at 45.29/31 on the back of heavy dollar interest from banks and corporates.

"The purpose of the measures was to shift, at the margin, the relative cost of buying rupees vis-a-vis foreign currencies in the short-run. These measures were deliberately spaced out, and the quantum of increase was smaller than what would have been required to defend a particular rate." In a detailed statement, Jalan placed the short-term developments in the rupee vis-a-vis dollars in proper perspective.

"It is necessary to pay attention to what is happening to the value of the dollar in relation to other major currencies during the period. Yesterday (August 2, 2000), for example, the rupee depreciated against the dollar by 21 paise (over the reference rate on August 1, 2000) or less than 0.5 per cent. On the same day, the dollar appreciated against the Euro by 1.1 per cent and by 0.2 per cent against the Pound Sterling. Similarly, between 1 July and August 2, the dollar appreciated by nearly 4 per cent against the Euro, by 3.2 per cent against the Yen, and about 1.5 per cent against Pund Sterling as well as the rupee.

As a result of the movement of the dollar against these currencies, the rupee strengthened against the Euro by as much as 2.5 per cent, and by 1.5 per cent against Yen, and remained stable against Pound Sterling. These currencies (Euro, Pound and Yen) are currencies of India's other major trading and investment partners. Thus, while it is true that the rupee has depreciated against the dollar last month, it is equally true that rupee has sharply appreciated or remained stable against currencies of its other major trading partners in Europe, UK, and Japan. Going beyond the dollar, and taking the movement of the rupee against other major currencies, it is simply wrong to say that the rupee has hit `an all-time low", Jalan said.

Explaining the effect of oil prices and inflation on the rupee, it was pointed out that while prices of imported oil has indeed been high and that the increase in import bill substantially high, "it is important to remember that the prices of crude oil were also very high last year also". It was pointed out that oil prices were close to $25 per barrel at the end of December'1999 as against about $26 on August 2, 2000, "and yet, last year, we added to our reserves by $5.5 billion".

On inflation, Jalan said: "The major reason for increase in the rate of inflation in the recent period in India is the increase in the prices of petroleum products, including mineral oils, etc. Excluding this, the impact of an external factor, the annual rate of inflation in India currently is less than 4 per cent. In the US and Europe, as well as several other countries, it is normal to exclude the effect of oil prices, and certain other prices, for determining the core inflation rate for purposes of monetary policy decisions and inter-country comparison of inflationary pressures".

The governor made it categorical that the RBI does not use short-term movements in Real Effective Exchange Rates (REER), or any other similar variable, as an indicator of appropriateness or otherwise of exchange rate movements in the short-run.

Jalan also pointed out that despite the increase in the oil import bill as well as increase in non-oil imports in the wake of industrial recovery, the current account deficit in India is still less than 2 per cent of GDP, which is considered to be low and reasonable by international standards. "India's exports have also been doing exceptionally well in the current year. There has, no doubt, been a substantial outflow on account of FII funds in the months of June and July 2000, which has reduced the net volume of capital inflows into the country.

The FII funds, by their very nature, tend to be somewhat volatile, and our reserve policy in the last few years has taken this factor into account", Jalan said.

The governor clarified that it was wrong to presume that the RBI "would" or "should intervene" whenever the rupee reaches or is close to a "round number" or a particular level such as, "the lowest-ever in this year" or "in the recent past" in terms of the dollar.

"The simple point is that when the RBI says that it does not "target" a particular level of the exchange rate, it is intended to convey that there is no specific level, which it is prepared to defend, through unlimited sales of foreign currency and/or through introduction of strong monetary and other measures... the fact that RBI does not target a particular exchange rate does not mean that movements in the exchange market, irrespective of the pace and its level, are matter of no concern and can be ignored... It may be mentioned that while the July 21 measures were taken when the rupee was close to a round number, the May 25 statement by RBI was made when rupee-dollar value was 44.29. At that time, interestingly, nobody observed that this is a `Lakshman rekha" which RBI must defend to maintain its credibility!" Jalan said.

Rupee closes at 45.33
The rupee touched a new low of 45.45/46 on Thursday. It, however, rebounded to end at 45.33/34 on account of the squeeze in liquidity following outflows by the RBI through its multiple repo auction during the day. "Most participants in the inter-bank market felt it prudent to park their funds in RBI's repos at a higher cut-off rate compared to the ruling call rate.

This daily measure will gradually suck out excess liquidity from the system, reducing the pressure on the currency," the head of trading with a financial institution said, adding "the measure will restore some stability to the rupee." The rupee opened weaker at 45.29/31, as against the previous close of 45.32/33. "The currency fell on heavy dollar buying by state run and foreign banks," a dealer said. Banks were buying dollars for their corporates for ECB interest payments and oil payments. "The demand from foreign banks came on behalf of foreign institutional investors (FIIs)," a state run bank dealer said. Forex dealers expect the rupee to trade in the 45.30-35 range on Friday.