Increasing the risk of inflation due to surging prices of imported goods, on account of weakness in the rupee, and risks of volatility in foreign exchange rate make a case for RBI intervention, says a Standard Chartered report. “We take the view that rising imported inflation and forex volatility risks support the case for greater intervention. However, RBI is yet to signal that foreign exchange-related risks have increased substantially,” the report says. The central bank had briefly intervened in the foreign exchange market last week to cap the rupee below 48 per dollar, after the domestic unit fell by over 9.5% since July. This intervention came almost after a year, with the last intervention from the regulator in October just before the Coal India IPO, when the rupee escalated to levels above 43 per dollar. “Price action shows, downside pressure remains strong, and one-off intervention may not be enough in an environment of growing contagion risks,” adds the report. The report states that though RBI maintains it will intervene when the volatility in the rupee could disrupt the real economy, the central bank’s tolerance threshold for USD-INR pair has increased substantially, which has left the rupee vulnerable. The reasons cited for this aversion to greater intervention is the liquidity implications. “Banking-system liquidity is currently close to the lower limit of RBI’s comfort zone and is unlikely to improve near-term. In such a scenario, significant RBI intervention to stem rupee depreciation may strain liquidity to undesirable levels,” the Standard Chartered report says. With foreign exchange reserves of $316 billion, the central bank has sufficient capacity to intervene to support the market during periods of dollar demand-supply mismatch, say analysts.
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