'RBI may intervene if needed'

Sharp drop in rupee alarms government

The rupee dropped as worries about Europe's debt crisis and a worsening domestic economy raised demand for the US currency. "As RBI has already mentioned, it is watching the situation. As and when it is necessary, they will intervene," Mukherjee told reporters here.

RBI Deputy Governor Subir Gokarn had said on Tuesday that the bank would intervene in the forex market only in case of extreme volatility. Market participants are agog with the question whether the RBI should intervene in the foreign exchange market, but analysts say, central bank’s intervention in the forex market at this juncture could raise concerns over liquidity as bank’s dollar purchase could potentially suck out rupee liquidity from the market.

RBI intervention in the forex market is also not recommended at the time when the commodity prices have again started reigning high and there is an increasing domestic demand pressure. The rupee is already Asia's worst performing major currency this year, having tumbled by close to 12 per cent against the dollar so far in 2011.

The falling rupee has already pushed up the cost of country’s imports, particularly oil, in the past as many months.

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