Well, this is confusing.On Wednesday, CNBC TV18 and NDTV Profit quoted finance minister Pranab Mukherjee as saying that “the Reserve Bank of India would do whatever is needed to stabilise the rupee.” The comment comes a day after RBI Governor D Subbarao said no decision had been taken on whether the central bank would intervene in the foreign exchange markets to stem the rupee’s slide. On Tuesday, the rupee slid to an all-time low of 52.73 against the dollar on heavy dollar buying. Today, the rupee was more subdued, trading in a range amid speculation that the RBI had indeed stepped into the markets to inject some calm. However, if you go by what RBI officials have been saying recently, don’t expect that to become a habit. Last week, Subir Gokarn, a deputy governor at the central bank, cautioned that the RBI would be careful about using foreign exchange reserves aggressively to limit the rupee’s depreciation. Typically, the RBI has a hands-off policy regarding the foreign exchange market and only steps in to check the rupee’s value when absolutely required. In other words, only in extreme situations. However, Mukherjee’s statement seems to contradict that. In order to ‘stabilise’ the rupee, especially against the background of a snowballing eurozone crisis, the RBI might have to step in every other day. Is it really prepared to do that? All Subbaro has said is that the RBI is “watching the situation and would ensure the exchange rate does not impair economic stability”. “We expect that a reverse adjustment (in the rupee) will take place when the European situation resolves itself,” Subbarao told reporters on Tuesday. That means he expects the rupee to self-correct in time. Mukherjee’s statement will just confuse the markets, at a time when there is already so much uncertainty about how the rupee will perform each day. To be honest, Mukherjee should not be making policy statements on the currency (and what he said pretty much amounts to one), especially when the responsibility of currency management lies with the RBI. It would also help if he stopped contradicting himself as well. On Tuesday, Mukherjee acknowledged central bank intervention in the currency markets would have a limited effect on the rupee’s value. Now, he says the RBI will do whatever it takes to calm the forex markets. Why pressure the RBI into doing something when you know it’s only going to have a limited effect? Worse, who are markets supposed to believe?
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