Big daddy RBI holds sway over rupee market

Though the previous Governor Raghuram Rajan has left, the Big Daddy still controls the Indian currency market.

The RBI, which is called the Big Daddy in Mumbai money market, intervenes to curb rupee swings which was a strategy used by former Governor Rajan which saw a great volatility against Chinese yuan and pegged Hong Kong dollar.  Early signs are that new Governor Urjit Patel is just as committed to the cause, though he is required to work harder to stabilize the rupee:  India’s foreign-exchange reserves slumped very low, since 2013 in the first week of October, which suggested for selling of dollars.

There are people who make a living out of volatility, who do not like Big Daddy; however, the Big Daddy is a good friend of investors, with the currency calm helping the rupee deliver Asia’s best total returns. Patel has already provided one surprise -an interest -rate cut has diluted the bank’s previous inflation framework.  Some add, that investors and companies are not prepared for the consequences should the central bank lose its rupee grip.

Equally some feel that pushing volatility continuously lower has its risks.  If the central bank is signalling a more accommodative policy stand, can we presume that this makes hot money hotter?  If and when the turn comes, will people fly faster?  India’s monetary authority has bought and sold $415 billion since August 2013, about five times more than transacted in the previous three years.

Incidentally, the former Governor, Rajan had said the central bank intervenes to curb volatility and doesn’t target any particular rupee level.

Author: Admin Bankedge

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