RBI will use all tools to check if rupee fall escalates: Gokarn

05 Dec 2011 Evaluate

The Reserve Bank of India (RBI) has indicated that it may intervene the currency market to stop the decline of Indian rupee. The RBI deputy governor Subir Gokarn said, India's central bank will use all available tools to stem a fall in the rupee if the currency's downward spiral escalates and will take steps to keep liquidity in the country's markets at comfortable levels.

Since July 2011, the partially-convertible rupee has decline around 16.5% as risk-averse investors flee emerging markets, increasing concerns for the government hit by high inflation, slowdown growth and increasing trade deficit.

Subir Gokarn said, 'we do have the instruments and the capacity to enhance the supply of foreign exchange into the markets, and as demonstrated by the recent actions, will use them as appropriate. If we do see the short-term risk of a downward spiral escalating, we will not hesitate to use all available instruments.'

Rupee fell snapped a four week falling trend on December 02 after weakening by 6.7% in November, which is its biggest fall since January 1995.

Gokarn further indicated that the RBI will also continue to inject liquidity into Indian markets to make sure smooth functioning of the financial markets given the bank’s forecast for tight conditions in the near future.

'Currently, the Indian banking system holds government securities to the tune of 29% of net demand and time liability (NDTL), which is above the statutory requirement of 24%. Gokarn said, ‘this reflects a relatively large capacity for liquidity infusion as and when the need arises'. By adding further he said, ‘we have been injecting liquidity into the market through the liquidity adjustment facility and open-market operations, and we will continue to do so as conditions warrant.’

Last week, the RBI bought Rs 57.83 billion worth of bonds via open market operations (OMO), just after a week, buying Rs 94.35 billion through the same process. The OMO is a tool by which central bank control the short term interest rate and the supply of base money in economy, thus indirectly controlling the total money supply.

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