Friday, December 16, 2011

RBI intervenes in the currency market

Here is a quick followup to a recent post called “India's central bank - between a rock and a hard place

Last night the RBI reacted swiftly to address the severe pounding the currency has been taking recently. INR (the rupee) is a “controlled” currency – not freely traded the way something like JPY trades. The banking system is also quite tightly regulated. Therefore the RBI was able to take a somewhat unorthodox action – restrict in trading of currency forwards.  This is in addition to capping the amount of outright FX exposure Indian banks can maintain.
The Times of India: Dealers said the sharp recovery of the rupee was due to restrictions imposed by the RBI on forward trading in the local currency by FIIs and traders, besides the cap fixed on banks' exposure to the forex market. 
The impact on INR  was immediate – see chart.

USD/INR (Bloomberg)
However the currency is still down on the week and continues to stay weak relative to historical levels. What’s more troubling is that the stock market has weakened to new recent lows (see chart) – indicating rising risks of a slowdown in India's economy.

NSE NIFTY Index (Bloomberg)
The latest GDP growth figure was 6.9%.  This indicates the next reading may be lower.
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