'RBI must enter forex market to support Rupee, curb inflation'
to the dollar. The life-time low of the local unit was in mid-June when it had plunged to 57.15 to the greenback. In the year-to November 2, the RBI had sold over USD 21 billion to prop-up the rupee. Between August and December 2011, the rupee had lost 17 percent.
"We do not expect the forex market to get bullish on the rupee until the RBI has recouped forex reserves. After all, the country's import cover has halved to just about seven months -- the least since 1996 -- from 14 months in 2008.
"The RBI will need to buy USD 90 billion if it is to replenish the import cover to even nine months. Just as importantly, the forex market will also fear that the rupee may see disproportionate losses in case the dollar shoots up," Sengupta said.
He further said to stabilise the rupee, "The best solution surely will be for RBI to accumulate forex and the forex market to buy the rupee.
"The RBI should then achieve its twin objectives of stabilising the forex market and reducing 'imported' inflation pressures. The forex market could easily make 5-10 percent and its gains would be relatively better protected if RBI is in a stronger position to protect the rupee from contagion," the report said.
The report said "not only has RBI not been able to buy forex, but it has also actually had to sell USD14 billion forwards.
"Barring occasional bouts of optimism, most of which have ended in grief, the forex market has
