No target for rupee level, says RBI

No target for rupee level, says RBI
ENS ECONOMIC BUREAU

Mumbai, Aug 3: Reserve Bank of India (RBI) governor Bimal Jalan on Thursday made it clear that the latest set of measures were not designed to defend a specific exchange rate, but "are most conducive to promoting orderly conditions in the forex market".

"The simple point is that when 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.

The central bank governor's statement came after trading hours on a day when the rupee fell 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 rupee, after touching the record intra-day low of 45.43/45, gradually recovered in the day and ended at 45.34/35, showing a marginal loss of two paise from the previous day's close of Rs. 45.32/33.

"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," Jalan said.

"It is necessary to pay attention to what is happening to the value of 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, 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 2 August 2000, the dollar appreciated by nearly 4.0 per cent against the Euro, by 3.2 per cent against the Yen, and about 1.5 per cent against Pound Sterling as well as the rupee,'' Jalan said.

As a result of the movement of 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 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 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 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 noted "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.