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Fragile dollar reserves: RBI prefers modest foreign exchange intervention?

23.09.11

A persistent current account deficit and realisation that an uncertain global environment is bound to keep markets volatile are reasons the RBI is loath to intervene in a big way, spending its small pool of dollar reserves, sources with direct knowledge of the matter told Reuters.

While many Asian central banks including South Korea, Indonesia and Philippines have been spotted selling dollars to protect their currencies, the RBI has put up only a token show, with some minor intervention in recent weeks.

India's partially convertible rupee has been the worst performer among major Asian currencies -- so far in 2011, losing nearly 12 per cent of its value since touching its 2011 high of 43.855 against the dollar on July 27.

"Intervention depends upon the pace of volatility. But the threshold for volatility also changes with the situation," an official familiar with the matter told Reuters.

"Look at how the euro has been behaving, how gold, US Treasuries have been moving. If all asset classes are so volatile, then the tolerance level will also rise."

The rupee has weakened nearly 7.2 per cent against the dollar since late August, on heightened concerns over European sovereign debt and a likely Greece default. The euro has fallen on most days since Aug. 29, 7.3 per cent down in the period and touched a seven-month low of $1.3499 on Sept. 12.

Source: Economic Times