Medium-term goals to guide RBI action on rupee

Describing the sharp depreciation of the rupee as “disruptive”, the Reserve Bank of India today said any action to arrest the fall will be guided by medium-term considerations.

“We don’t really have a target or a rate in mind. It’s moving as per market dynamics. It (fall in the value of the rupee) is disruptive, there is no question. There (will be) impact on our import bill, particularly for energy. It’s having an impact on companies and it is a problem,” the Reserve Bank of India Deputy Governor, Dr Subir Gokarn, told reporters here.

The rupee has been depreciating for quite some time and fell to a historic low of Rs 52.73 per dollar in early trade today.

On the possibility of action by the central bank to arrest the fall of the rupee, Dr Gokarn said, “Any action we take now (will) have to take into account the fact that these actions might have consequences a little further down the road. So we have got to balance out actions with risks or a potential increase in vulnerability later on...”

“Actions have to be weighed in terms of their medium-term risks,” he added.

The immediate impact of the fall in the value of rupee, he said, will be on the inflation rate, which has been hovering near the double-digit mark for several months.

“We should not be looking at only the short-term when we make these judgments. Every action that has been suggested...that has been debated, also has potentially adverse consequences down the road. So we have got to balance out those too.”

Although the RBI has been maintaining that the exchange rate should be market-determined, it is volatility that has been worrying the central bank.

“... Volatility is another thing. This is the sharpness and speed of the movement that is obviously creating some disruptions. We don’t know where it is going to go, but it is something we need to watch out for,” Dr Gokarn said.