RBI's moves fail to halt rupee volatility

MUMBAI: The Reserve Bank of India says it does not target a level for the Indian rupee versus the US dollar, but its professed objective of reducing volatility is faltering as well.

The rupee is likely headed lower, though not as sharply as it did since May 22, because of RBI's monetary tightening. But India's high current account deficit - the excess of spending overseas over earnings - and rising yields in the US and UK could lure investors away from local stocks and bonds.

The Indian currency's three-month historical volatility has climbed a basis point to 11.92%, the highest since February 2009, according to Bloomberg data.

"The Reserve Bank's actions have failed to control currency volatility," said Partha Bhattacharya, deputy chief executive, Mecklai Financial.

"One-month currency volatility has remained in the range of 10-12% even after RBI's intervention on July 15," said Partha Bhattacharya of Mecklai Financial.

RBI's sudden decision on July 15 to raise short-term rates by as much as 200 basis points and reduce the funds available through its liquidity adjustment facility has squeezed money markets. But the desired effect on the rupee is yet to be seen, since pullout by foreign funds is impacting the currency more than speculation fuelled by liquidity.

RBI on Thursday announced auction of Rs 22,000 crore of cash management bills every Monday. The rupee fell to a record low of Rs 61.80 to the US dollar on Tuesday. It climbed back a bit to end at Rs 60.88 on Thursday.

"In India, the RBI does not target any exchange rate. We intervene in the foreign exchange market only to manage the volatility and to manage the disruption to the macro-economic situation," said RBI Governor D Subbarao.