In 45 days, RBI comments accelerate dip in rupee

In the space of less than two months the rupee has dipped on four
occasions on the back of comments from the Reserve Bank of India. This
is significant considering the rupee has been falling for nine
straight weeks in any case after the US Federal Reserve began a series
of announcements that it will be gradually withdrawing from the
stimulus but the comments have accelerated the fall.

The latest was on Thursday last week when the RBI Governor D Subbarao
said "we do not have an exchange rate target" for the rupee. As the
chart shows the dips have been sharp, but what is of concern is that
the comments have exacerbated the degree of drop. All through this
period the foreign institutional investors have consistently withdrawn
money leading to more concerns that the high current account deficit
will be more difficult to finance.

According to data compiled by India Forex Advisors, after Subbarao's
comments on Thursday, the rupee for instance depreciated from 59.90
levels to 60.40 level against the dollar on Thursday. "The markets
were expecting the RBI to calm nerves of investors and prevent further
depreciation, but the comments failed to do so," said an analyst
requesting anonymity.

Similarly, when the RBI chose to leave policy rates unchanged in its
mid-quarter monetary policy review on June 17, the rupee initially
appreciated. But later during the day, it started weakening after RBI
concerns on inflation and current account deficit was read in detail
by the markets. The rupee fell from 57.60 levels to 58.10 levels to
the dollar.

"It is only a durable receding of inflation that will open up the
space for monetary policy to continue to address risks to growth," the
RBI said in its mid quarter policy review (see chart). Currency
markets are naturally expectation driven and such volatility does add
to the movements, analysts agreed.
The comments have come around the same time when the finance ministry,
especially its chief economic advisor Raghuram Rajan have attempted to
go the other way, instilling confidence in the rupee through detailed
press briefings on more than one occasion.

For instance just two days after the RBI mid quarter review's hawkish
tone, Rajan on June 20 said the government is not short of options to
tackle the fall of the rupee. He also said the RBI will take action to
support the rupee as appropriate.

Because of the sensitive nature of the topic analysts were unwilling
to come on record. "It's a tricky relationship. The RBI's comments, be
it on interest rates or inflation, always has the ability to move
markets," said an analyst.