RBI needs to step up FX market intervention – StanChart

(Reuters) - The Reserve Bank of India (RBI) needs to more actively intervene in the country's foreign exchange market to stem the rupee's fall as imported inflation rises and exchange rate volatility risks increase, said Standard Chartered Bank in a research note on Wednesday.

The increasing chatter about intervention comes as the partially covertible rupee touched a two-year low of 48.24 to a dollar on Tuesday and remains the worst performer amongst the 10 major Asian currencies. It has already weakened by over 7 percent so far this year.
The RBI, in its mid-quarter policy review last Friday, said that the rupee's depreciation may have adverse implications for inflation.
Foreign exchange dealers have suspected the RBI's presence in the foreign exchange market in recent sessions, but it hasn't been significant to turn the rupee's fortunes.
The RBI's stated position is that it intervenes only to stem excessive volatility. But in recent years, it has largely let the rupee free unlike its Asian peers.
A bulletin released by the RBI on Sept. 13 showed it had not bought or sold dollars in the foreign exchange market for eight successive months including July.
But, the RBI's hands-off policy may have made the unit more vulnerable during periods of risk aversion, the report said.
Standard Chartered however said that the central bank is yet to signal that forex-related risks have risen significantly.
This may be partly due to the central bank's higher tolerance and partly due to the liquidity implications of higher intervention, the note said. Higher intervention will lead to a squeeze in rupee liquidity from the system, lowering system cash to "undesirable levels," it said.
"Hence, intervention is likely to stay sporadic and low, aimed at addressing volatility rather than imported inflation risks," the report said.
At 2:50 p.m. (0920 GMT), the unit was at 48.11/12 per dollar after rising to an intraday high of 47.8375.
(Reporting by Aditya Phatak; Editing by Subhadip Sircar)