Mumbai: The landscape for the rupee appears to have shifted, with the once remote 40-per-dollar level suddenly within reach as the Reserve Bank of India (RBI) takes a more hands-off approach to its currency and to two-way capital flows.
Analysts say a decision by the central bank last week, to allow more overseas investment by companies and mutual funds, was a pragmatic response to strong capital inflows that are pushing up the rupee and making it harder and harder to control.
The partially convertible currency is just over a rupee away from 40 per dollar, a level unseen since 1998. Analysts expect that level to be hit during the year before weakening as the central bank steps to check its appreciation.
“The day-before-yesterday’s volatility is today’s flexibility,” RBI governor Y.V. Reddy said after making an annual policy presentation last week.
The reason for the central bank’s more relaxed attitude towards the rupee appears to be threefold.
Firstly, a rising rupee can act to combat inflation, which has prompted five interest-rate increases in under a year.
Secondly, central bank currency intervention to try to control the rupee has fuelled money supply, and by extension inflation. Thirdly, the central bank is warming the market up for convertibility where capital flows in and out of the country will be given a much freer rein.
The rupee’s volatile past is it’s flexible future, says RBI chief
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