RBI intervened as rupee breached 48/$ intra-day on Wed

After a gap of nine months, the Reserve Bank of India (RBI) intervened in the foreign exchange market to support the falling rupee, which drifted close to a two-year low in early trade on Wednesday.

Fears of a debt default in the euro zone, following the rating downgrades of two of the largest French banks, and growing concerns over global growth led the rupee to close at a 16-month low of 47.65 against the dollar, having touched 48.01 during the day.

The Indian currency has depreciated 6.86 per cent since April but further loss was capped by some amount of Mint Road selling on Wednesday, foreign exchange dealers said.

They said the RBI participation was even less than $200 million, but support at the level of 48 triggered more dollar dumping by banks and exporters. As a result, the rupee fell only by five paise on Wednesday as compared to a fall of 38 paise on Tuesday and 65 paise on Monday.

"This suggests 48 is a level the RBI is not comfortable with," said a treasury official of a Mumbai-based public sector bank. The RBI has said it would intervene only if there was persistent volatility in the foreign exchange market and not with an objective to fix an exchange rate.

"The RBI probably intervened at 48 because the rupee came down by 20 paise after that and stayed around the 47.75 levels for the rest of the day," he added.

Economic affairs secretary R Gopalan on Wednesday said, "I have a feeling the RBI is following a good policy of non-interference.

But once it goes beyond a point, obviously we need to look at how we can. The question still remains in the RBI's domain and they know what right action to take."

"I don't think we need to give up our policy for short-term disruption in the market," he said. "The global situation being volatile, there is a rush to find safe havens for money. And, that is probably causing rupee exchange-rate changes," said Kaushik Basu, chief economic adviser.

A bulletin released by the Reserve Bank of India yesterday showed it had not bought or sold dollars in the foreign exchange market from November to July. According to the Bombay Stock Exchange (BSE), there were net fund outflows of around Rs 45 crore (Rs 450 million) even as the equity markets gained about 1.5 per cent on Wednesday as markets were mainly driven by technology shares.

The CNX IT Index on the National Stock Exchange (NSE) shot up 4.2 per cent on Wednesday and 5.2 per cent for the past two days on hopes these companies would benefit from rupee depreciation.

Euro zone woes have intensified with fears of a Greek default. The euro has depreciated more than three per cent against the dollar over the week. Analysts expect the Indian currency to depreciate further due to concerns over the impact of Europe's debt crisis on the global economy and a slowdown in domestic growth.

"The bottom line is we see very little support emerging for the rupee in the near term... given the pace of the current momentum, a possible near-term upside of 48.50-48.70 cannot be ruled out," said HDFC Bank in a research note.