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How RBIs role has changed in this rupee rout

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Mumbai: The Reserve Bank of India's role during the recent rupee slide may be questioned as to why it allowed a steep fall, but bankers say that the central bank has been active with constant oral intervention with dealing rooms.

It has assessed the reasons behind the fall which helped it conclude that there was no severe panic, but genuine trade related transactions that drove the rupee down, multiple bankers told ET on condition of anonymity.

The rupee Monday hit another record low at 71.21 a dollar amid overseas fund outflows, losing 0.31% from Friday.

An email sent to RBI remained unanswered until the publication of this report.

“The central bank is also keen to understand if any bank is taking any wild speculative bet, which could exert more pressure on the rupee,” said one of the persons cited above.

Earlier in 2013 when the rupee had hit a record low, some corporates/banks were seen short-selling the rupee aiding its further fall, a move aimed at sheer trading profits.

Moreover, the custodian banks, which transact on behalf of their clients: foreign portfolio investors were under the watchful eyes with the RBI checking daily dollars outflow levels. Some large banks are said to be receiving about five-six calls daily from the regulator.

The rupee has been touching record lows in the past two weeks. Last Friday, it hit record low at 71 a dollar amid weakness in emerging markets, sparked off by the Argentine and Turkey currency collapses.

Traders could spot only intermittent interventions barring a few occasions.

Whenever the rupee has inched closer to 71, a psychological level or even touched it, some state-owned banks are seen selling dollars, supposedly on behalf of the central bank.

The RBI intervention becomes only effective when there is no large outflows from India.

“It would have created arbitrage opportunities if RBI forcefully resists rupees rout when there are overseas investment outflows,” said a currency dealer.

RBI has too stepped up intervention when the rupee plunged as a one-off case, not in sync with majority of emerging market currencies.

For example, last week global investors turned jittery on emerging market currencies particularly with large current account deficit, excess of overseas spending over revenues. Indonesian rupiah and Indian rupee were too immediately victims in the wake of rising crude oil prices. Both lost quick values to the dollar.

On August 14 and 15, when the rupee crossed the then crucial mark of 70/$, the RBI was suspected to have defended the level as other peer currencies did not fall. Instead, Turkish lira showed some signs of correction.

While the central banks stated position has been that it would step in to curb volatility, the RBI was conspicuous by its hands-off approach on days the rupee fell precipitously.

“This time RBIs intervention was in stark contrast compared with 2013 as the RBI appears to be keen in reducing RBIs overvaluation now,” said another head of trading from a large currency desk.

According to the 36-currency RBI Real Effective Exchange Rate (REER), the rupee is overvalued 15%. The six currency REER gauge shows a 23% overvaluation for the local unit.

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