When an earnest looking Subbarao and his imposing Deputy Subir Gokarn tell the world that the RBI will not prop up rupee to rein in inflation, currency traders rub their hands in glee. For them, it's another opportunity to make money: buy dollar and sell it a few days later, with the central bank promising to stay out of the market. The RBI top brass isn't exactly saying anything unusual. It's a line that central banks and monetary authorities of all IMF member-countries take, to make the simple point that they don't manage currencies which function as full floats. But when uncertainties are in the nature of 'unknown unknowns', sentiments swing with new and rapidly changing stories, and jumpy traders fish for every little window to recover losses, staid statements can be electrifying and communications can backfire. May be, the RBI should have kept the market guessing about its intentions, even if it had no plans to dump dollars. Views like these are a part of a chatter that Mint Street has goofed up on the dollar. That it let the rupee slip too low too fast. That it should have sold dollar more aggressively to unnerve speculators . That it miscalculated the demand-supply mismatch. That it should have known better than others that opening a few doors - like allowing corporates to take more dollar loans and foreign portfolio managers to invest more in local bonds - won't cause a dollar deluge. After all, global investors don't always rush in just because rules have been loosened. RBI backers have a ready rebuttal: when the dollar is gaining, trying to pull it down is a mindless and futile exercise; can you go on selling dollar when euro is on the brink; why dip into forex reserves, etc. While these arguments have a merit, a more assertive RBI could have turned the rupee's decline less dramatic for the market and less damaging for business. The US dollar index gained a little less than 4% since August 8 - the first trading day post US debt downgrade which marked the beginning of a new phase of volatility. While the euro fell 3% between August 8 and November 11, the rupee fell 10% against dollar. There are doubts whether the rupee's depreciation, one of the highest, can be largely attributed to the dollar's gain globally. But while most central banks have either acted or signalled that they would act to ensure "orderly movement" of their respective currencies and protect the real economy, the RBI has often been loud and explicit that it will not intervene. Amid raging inflation and high crude price that drove oilcos to raise petrol prices, one wonders whether it made sense. The bulk demand for dollar in the past three months came from bunched up oil payment to Iran, defence payouts, regular oil purchase and FII outflow. Inflow dipped as global risk aversion grew. RBI officials may have felt that the outgo on account of Iran and inflow from a large high profile FDI deal would offset each other. But simple arithmetic went haywire as the dollar surged with more bad news from Euroland. The sharp slide in the rupee, however, could have been tempered if the RBI had supplied dollar to the market and kept bulk demand from oil companies and PSUs off the market. It could have not only improved inflation and corporate earnings, but also upheld RBI's professed policy of maintaining "orderly movement in the currency market" .
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