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Reserve Bank not to step in

New Delhi June 10: The Reserve Bank of India, is unlikely to regulate the rupee’s rise against the dollar as an intervention will increase money supply which can spur inflation.

Analysts and dealers said the RBI is reluctant to stem the rupee’s rise, which rose 4.4 per cent over the last 12 months, after nearly a decade of depreciation, by aggressively buying dollars.

They said this process would pump rupees into a financial system where the money supply (M3) growth is more than the gross domestic product (GDP) growth, an indicator that inflation is heading north.

Money supply, in the current financial year, 2003-04 (April-March), stood at 15 per cent while the GDP growth forecast for the financial has been pegged at 6 per cent.

Economists prefer a neutral intervention in the foreign exchange market, when caught between the policy challenges of curbing inflation and a rising domestic currency.

“The RBI has to stay off from regulating the rupee since it favours a softer monetary regime,” said K. K. Sengupta, a leading merchant banker. “And with inflation eating into real interest rates the challenge for RBI is to keep interest rates low as long as possible.”

At the same time, State Bank of India’s (SBI) chairman A. K. Purwar said today the soft bias in domestic interest rates was likely to continue due to falling global interest rates. Lower interest rates is expected to help both companies and the government in mopping up credit, thus reducing the stock of money available for consumption.

In April, the RBI in its credit and monetary policy had cut its benchmark interest rate by a quarter percentage point to 6 per cent, the lowest in 30 years, to revive economic growth after last year’s drought stunted growth to 4.4 per cent.

“I am a great advocate of stability in interest rates but seeing the global interest rate trend I think a soft bias in interest rates cannot be ruled out,” Purwar said.

Dealers forecast the rupee to continue it’s upward trend and is likely to touch the Rs 46 a dollar level by the year-end. Today, in the afternoon trade the rupee rose against the dollar to Rs 46.82/83 up from the morning trade of Rs 46.86/88.

“The country’s relatively higher interest rates coupled with the fact that the dollar is on a slide is attracting strong forex inflows,” said P. K. Choudhury, managing director of rating firm Icra. “But, this is affecting exports,” he added.

The exporters are worried as a stronger rupee makes exports costlier while global demand remains weak.

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