The Resesrve Bank of India (RBI) will not step in aggressively even as the rupee approaches a record low, as long as falls are orderly, as it believes global factors are behind the currency’s weakness, a senior policy maker familiar with its thinking said.
The official added there was no panic about the rupee edging near a record low of 68.85 to the US dollar hit in August 2013 — when India was mired in its worst currency turmoil in more than two decades. The rupee traded as low as 68.67 on Wednesday.
“There is no big concern on that front. Currently market fundamentals are driving the rupee down, so it is better to allow that to happen than to forcefully stop that,” the RBI official said.
“The predominant view within the government and the RBI is in favour of a stable and gradual depreciation and not a large and sudden fall.”
The official said that unlike 2013 when high current account and fiscal deficits sparked capital flight ahead of the US Federal Reserve tapering its stimulus, India now enjoyed lower inflation and was stronger than most emerging markets. While the RBI would not defend a particular level, it might sell dollars in case of sharp falls, he said.
The RBI’s actions this year suggest exactly that approach with traders estimating it had sold only about $77 million, a fraction of the $6 billion it spent in defending the rupee from August to September in 2013.
“Now that the uncertainty on Fed rate hike is not there, the risk of capital outflow is less than in 2015. So that will mean a gradual depreciation of the rupee,” he said.
Some traders, however, warned that the RBI might be under-estimating the risks. Meanwhile, in a volatile trade, the rupee on Thursday ended almost flat at 68.46 against the US currency after touching a fresh 30-month low of 68.58 in intra-day trade.