The Telegraph
Wednesday , October 17 , 2012
Since 1st March, 1999
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Watch-&-act policy on rupee

Khan: Setting norms

Mumbai, Oct. 16: The Reserve Bank will intervene in the forex market in case of extreme volatility of the rupee as it has done in the past, RBI deputy governor H.R. Khan said here today.

“(When) there are extreme situations, where there is extreme volatility...we have intervened in the past. If there are cases of extreme volatility, we will also intervene in the future,” Khan said at the FT-Yes Bank event here.

He added, however, that the stated policy of the RBI was not to intervene in the forex market and let the market forces determine the exchange rate.

Referring to the steps taken to check volatility in the domestic currency, Khan said, “We have taken both tactical and strategic measures. The government has also taken some steps.”

The rupee, which has strengthened to the 52-level in the recent past, has shown some weakness in the last two trading sessions and breached the 53-level yesterday after the wholesale price index based inflation rose to a 10-month high of 7.8 per cent for September. Khan said monetary and fiscal policies had to move in tandem.

“As we have articulated time and again, it (monetary policy) has to be in tandem with the fiscal policy. It has to be a joint venture. It is not a solo play,” Khan said, adding that the fiscal deficit is one of the major concerns in the current situation.

He said supply side response is required for inflation management.

Khan also said the government and the RBI were planning to introduce a “premium budget” to retire illiquid securities in the G-Sec market.

“Years back, there was a buyback of illiquid securities by issuing new ones and there was something in the budget on the premium. Current situation doesn't permit (that). Even without that we are planning to do something; we'll have over a period of time, (we will set aside) some budget for these buybacks," Khan said.

“We’ll provide for the premium so we'll try to retire some securities where volumes are low,” he added.

The RBI is working with the government to start a premium budget, which allows the central bank to buy back those illiquid securities by paying premium to the bond holder, Khan said.

In the G-Sec market, majority of the volume is generated through trading in 2-3 securities such as the 10-year G-sec, while the rest of them witness very thin volume. About the stimulus measures announced by the US government, popularly known as QE3, Khan said it would create price pressure on commodities and might increase the country’s imported inflation along with exchange rate volatility.

He added, however, that QE3 would aid global growth, which in turn would help the domestic economy.        Talking about forex risks posed to various entities due to exchange rate volatility, Khan said that country's overseas loan exposures remained unhedged up to 65 per cent as of now.

The RBI is also contemplating to have a consolidated sinking fund to manage the forex risks of state governments, he said, adding that part of the CDR requests from the companies is due to forex losses.