Rupee and the Monetary Challenge

Where is the Indian Rupee going and the economy shaping up? A nice article from Reuters.

India’s central bank is trying to drain the banking system of excess cash to fight inflationary pressures, but the squeeze on funds has helped send the currency to an 11-month high.

Now the market is wondering how much more rupee strength the central bank will tolerate, especially as intervention would involve selling rupees into the market — thereby adding more of that extra cash it is trying to drain out.

The Reserve Bank of India (RBI) says that when it intervenes, it does so to calm rupee volatility.

It steps in when foreign investment flows into the stock market, for example, drive the currency up more rapidly than it likes, as when it was suspected of toppling the rupee from what was an eight-month peak of 44.35 per dollar in November.

However, the currency touched 44.1250 on Jan. 2 with no sign from the monetary authority and is now holding at about 44.30.

“The rupee has been an underperformer vis-a-vis other Asian currencies,” said Gaurav Kapur, senior economist with ABN Amro Bank.

“You cannot stop the rupee’s appreciation, given the kind of capital inflows we are witnessing. Chances of intervention are lower.”

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