The move came as India’s foreign exchange reserve increased
by $2.563 billion to $294.158 billion for the week ended October 1, gaining for
the third straight week on account of revaluation.
Foreign currency reserve also rose by $1.978 billion to
$266.507 billion during the week, according to the Reserve Bank of India’s
(RBI) weekly statistical supplement.
“Our intervention will be to keep liquidity conditions
consistent with activity in the real economy and to maintain financial
stability,” said India’s central bank Governor Duvvuri Subbarao. “And not to
stand against developments driven by changing economic fundamentals.”
Last week, the RBI said it will avoid intervening in the
foreign-exchange market for the 11th consecutive month as the relative strength
of the rupee, Asia’s second best-performer in September, helped curb inflation.
The Indian rupee, which gained five percent against the
dollar in September to become Asia’s best performer, was boosted by fund flows
from foreign institutional investors (FIIs) that crossed the record $22.05
billion mark this year. Of the total FIIs, $5.43 billion were flowed in during
September alone.
“In recent months, when inflows have swamped most emerging
market economies, several central banks have intervened in the forex markets,”
Subbarao was quoted as saying after attending a seminar on emerging markets
hosted by the International Monetary Fund in Washington.
“The reason we did not feel the need to intervene is because
our absorption, driven by a widening current-account deficit as imports have
surged on the back of a positive outlook on growth and investment has also
increased,” he added.
Such statements hint that though policymakers have zeroed in
on such inflows and the potential threat of asset-price bubbles, intervention
or any form of capital controls to rein in the rupee is unlikely in the near
future.
With the rupee’s gains largely reflecting a broadly
weakening dollar, intervention would likely prove ineffective at this stage.
The rupee’s rise, as measured by the real effective exchange
rate, has lagged its export counterpart in South Asian and North Asian between
January and August, according to Bank of International Settlements data.
Indian Finance Minister Pranab Mukherjee also played down
the talks of possible capital controls, saying that capital inflows have not
affected the market sentiment.
“India is not contemplating any restrictions on foreign
institutional investment (FII) and foreign direct investment at this point of
time,” he added
Inflation is yet another reason why the RBI may take it easy
on the rupee. Consumer prices remain high, with headline inflation at 8.5
percent on-year in August; a higher rupee will provide some relief to
policymakers as it cuts into imported inflation.
The Indian government may not intend to harm foreign
investor sentiment, particularly when it needs the inflows to narrow down the
current-account deficit. The April-June gap stood at $13.7 billion.
According to an Institute of International Finance report,
private sector investments in emerging markets, which includes India and China,
is projected to touch a whopping $825 billion, mainly spurred by strong growth.