rediff.com: RBI blows hot and cold, but grips rupee

The Reserve Bank of India's, or RBI, signals to the market during the rupee's four week slide may have been confusing, but it has not eased its stranglehold over the currency, analysts said on Friday. The rupee stabilised on Friday after a stern warning from the Reserve Bank of India, or RBI, issued when the currency fell to a new intra-day low of 44.95 per dollar on Thursday.

On Friday, the rupee closed at a record low of 44.76/78 to the dollar against 44.72/735 on Thursday.

It has lost 2.5 percent since early May, during which the central bank intervened with strong verbal warnings twice when the markets turned volatile.

The central bank has on several occasions reiterated its stand on letting market forces set the trend so long as there was no speculation or volatility.

It maintained a silence during the gradual slide, reinforcing market view that a correction in the rupee's overvalued status was being encouraged, but with a strict hold on the pace.

Traders said this was no different from the periodical depreciation the rupee has gone through in the past.

The rupee has been stable in the 43.20-43.65 band against the dollar since June 1999, and so was nearing the time when a depreciation could be permitted.

Now traders are converging on the view that the correction the central bank wanted, to adjust the rupee for higher local inflation and a strong overseas dollar, is complete.

As in the past, importers have been shaken out of their complacency and made to pay the price for staying unhedged.

The 44.75 per dollar level around which the RBI stepped in twice may become the new level around which the rupee is expected to move, though the central bank has not explicitly said so.

Through the month the central bank's physical intervention via state-run banks continued and, on Friday, import demand was taken care of by their dollar sales.

Foreign exchange reserves are high at $ 37.324 billion, but a billion dollars lower than levels in April.

The failure of the central bank to indicate a level or firmly protect the rupee through aggressive intervention was a reason the market was still uncertain, dealers said.

"The signal that emerged from the RBI's warning was open to more than one interpretation. On the one hand the RBI said volatility was not appropriate, yet it did not state a level it was targeting," said P K Basu, Chief Economist-South East Asia, Credit Suisse First Boston, Singapore.

"Unless there is clarity on where the rupee will settle, earners of foreign exchange will hold back," he said.

The RBI has always maintained "it does not target a particular value of the rupee in relation to the dollar."

Speculation has been banned for close to two years by RBI rules, volatility is snuffed out instantly and there is emphasis on prudent risk management by corporates.

The rupee, convertible only on the current account, lost just two percent in the 12 months to April, a reason most foreign currency players in the market chose to stay unhedged.

He can take credit for steering the currency ably through an Asian crisis in 1998, yet currency traders blame him for the current market illiquidity and their shrinking profits.

Market volumes are half their levels in 1998, and finding trade opportunities in the dull rupee market, a real challenge.

The RBI's directive to banks to maintain square positions through Thursday was a further blow.

One bank, in its market commentary, hinted at how dead the market had become. "Rest in peace", it said.

"It is not sensible to have such a managed currency. The more we move, the more volatility we see, the more mature the market becomes," said Surjit Bhalla, director of Oxus Fund Management.

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