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Forex Intervention: Pays To Be Unpredictable

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Reserve Bank of India Governor Duvvuri Subbarao said it pays to be unpredictable when it comes to intervening in the foreign exchange market as this approach makes intervention policy more effective. A central bank should have two policies, one strategic policy that is clearly laid out and stable, and another tactical policy that is more unpredictable, Subbarao said at an international conference organised by the RBI. "On tactical policy, it pays to be a bit unpredictable on how you intervene in forex market," Subbarao said. "Strategically, clearly lay out your policy, communicate the policy and keep that policy stable over time," he said. RBI Deputy Governor H.R. Khan said last week that any central bank intervention must involve the forwards market as well as the spot market. Traders say the RBI has likely been intervening in the market in recent weeks to stem the rupee's fall. The rupee, which fell close to 16 per cent in 2011, gained more than 7 per cent in January. "The promise of more volatility in the exchange rate is good for India," said Jim Walker, managing director, Asianomics. "It will make corporates think twice about taking on dangerous foreign debt exposure and keep the markets guessing about the direction of policy. That is the way a central bank should be operating," Walker said. Traders say the RBI probably last sold dollars at around the 50.25 rupee level on January 25, pushing up the rupee to 50.09/10. The rupee strengthened past 49 to the dollar for the first time in three months on Thursday as dollar inflows for portfolio investment remained strong. (Reuters)