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After rupee crisis, Raghuram Rajan's RBI shores up currency's defences

May 20 2014, 15:54 IST
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Raghuram Rajan is reviewing exchange rate policy, three officials with knowledge of the matter said. (PTI) Raghuram Rajan is reviewing exchange rate policy, three officials with knowledge of the matter said. (PTI)
SummaryEven as money floods into India, Guv Raghuram Rajan-led RBI is bracing for the worst.

Even as money floods into India, Guv Raghuram Rajan-led Reserve Bank of India (RBI) is bracing for the worst, building up currency reserves and drafting a game plan to protect the Indian rupee against the sort of rout that alarmed policymakers and investors last year.

Raghuram Rajan is reviewing its exchange rate policy, three officials with knowledge of the matter said, after the rupee's drop to a record low in August spurred criticism that it was ill-prepared to manage a heavy sell-down by foreign investors.

The RBI is determined not to let that happen again, and is taking advantage of a rupee recovery on a flood of overseas money betting that Narendra Modi's Bharatiya Janata Party would sweep to power and set the stage for a revival in Asia's third-largest economy.

The BJP scored a resounding victory in vote counting on Friday, knocking the Congress party out of power after a decade.

"In 2009, 2010, there was this great hands-off approach. But now we are thinking of reserve accretion," said an official aware of the RBI's approach.

"We need to prepare ourselves against any kind of storm that is going to come up," he added.

The three officials declined to be identified because they were not authorised to speak with the news media.

While buying up dollars gives comfort against the prospect of a future sell-down, it can add to inflationary pressure by boosting rupee liquidity, and the RBI's push to build reserves is tempered by its deep-seated wariness of inflation, the officials said.

A potential flood of rupees into banks as a result of RBI dollar-buying may thus force it to "sterilise" excess rupees, removing them from circulation by selling bonds, they said.

However, the key plank of its foreign exchange management plan is to buy dollars whenever possible to build reserves, with no specific target on how much it wants, the officials said.

"RBI has learnt its lessons. In the current situation where there are so many uncertainties like elections, global spillover, Fed fund rate hike, no amount of reserves is high," one of the officials said.

Traders say the RBI tends to buy dollars when the rupee strengthens above 60 per dollar. J.P. Morgan estimates that RBI purchases since February have totalled nearly $20 billion, including $4.1 billion in May.

As a result, India's dollar reserves surged to $313.8 billion as of May 9, the highest since November 2011, from a more than three-year low of $274.8 billion in

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