India: come doomsday, come foreign exchange intervention - James Lamont

If a stable currency is the measure of a central bank’s success, the Reserve Bank of India has done a stand out job with its restrained foreign exchange management. Asia’s third largest economy – where officials are proud of setting the country apart from other emerging markets – is in no hurry to go the Brazil route and grasp at tougher capital controls to boost the competitiveness of its economy. Subir Gokarn, the Deputy Governor of the Reserve Bank of India, is never one for overstatement. Yet, he underlined the “Indian difference” on Wednesday when he said that only a “doomsday scenario” would persuade the central bank to return to the days of heavy currency intervention to weaken the rupee. India remains a highly regulated economy, but that option has been firmly shelved unless needed “in extremis” to fend against disruptive, rapid exchange rate movements. Speaking at the Institute of International Finance’s spring meeting in New Delhi, Mr Gokarn explained that the central bank had stuck to its exchange rate policy of “a float with some smoothing” in spite of the global economic turbulence of recent years. The floating rupee is strikingly robust, and its recent strength has not got in the way of India’s improving export performance. Amid the turbulence 2011 has brought to emerging markets, the rupee has held its ground when local equity markets haven’t. It has weathered a pronounced sell-off of equities on the Bombay Stock Exchange, swirling corruption scandals and the imminent pain of higher oil prices in an economy notoriously dependent on oil imports.  It has similarly ridden out a slew of economic policy announcements, including the national budget, undisturbed. This week it coasted at a near two month high against the US dollar at a little below Rs45 to the dollar. The rupee, alongside other currencies in the region, is likely to strengthen further in the medium term. US dollar weakness, aggressive monetary tightening and an economy growing at 9 per cent will likely ensure that is so.  Mr Gokarn is plainly of a mind for such a rise to pass unimpeded.

http://blogs.ft.com/beyond-brics/2011/03/02/india-come-doomsday-come-forex-intervention/