Rupee sees largest-ever, recent devaluation in a week

The Central Bank (CB), as the Sunday Times reported last week, is changing tack in its foreign exchange management direction and allowing free market forces to operate. Soon after depreciating the Rupee by 20 cents on Friday, February 3, the authorities have been pushing down the local currency against the US dollar this week and limiting its intervention compared to wide-scale pumping in of dollars in the past year.

Dealers said that on Monday when the money market opened, the CB depreciated the currency by a further 20 cents pegging the Rupee at 114.30 per $1 against 114.10 on the previous Friday. On Wednesday, it was unchanged but on Thursday, the CB depreciated the currency by another 30 cents to 114.60. In the open market the dollar was traded at Rs 115.70, edging towards Rs 116.00 and then ending the day at Rs 115.25, resulting in the largest-even depreciation (70 cents) in a week of the local currency in the past six to 12 months.

Dealers said the CB pumped in $25 million on Monday and again $15 million in early Thursday trading but quoted CB officials as saying that the Bank is moving away from its intervention tendencies and would sell dollars only when a petroleum bill comes to the market. But the CB officials didn't rule out completely any intervention (as a buffet against essential import.

commodities) if and when the Rupee was seen weakening against the US currency. The change in CB policy came after the IMF urged a more flexible exchange rate policy saying the CB was using valuable foreign exchange reserves to artificially sustain the Rupee.

More than $2 billion has been swallowed by the markets as the CB defended the local currency, sending reserves down to $5.9 billion in December from $8 billion in August. Faced with rising credit growth, essentially due to burgeoning (often, unessential) imports and few dollars to deal with, the CB brought in the new policy on February 3 of increasing interest rates by 0.5 % and devaluing the Rupee and announcing that it would minimise its intervention in the market.