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How will RBI weather out currency swings?

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MUMBAI: The rupee has lost about 3% to the dollar since April, requiring India to pay more to slake its oil thirst. Yet, the central bank in one of the worlds biggest energy importers would rather use headline rates to help steer the macro-ship instead of setting currency pegs to cushion businesses and consumers against price shocks.

“Our monetary policy is determined by the nominal anchor that has been given to us through a legislative process, which is the consumer price index,” Urjit Patel, the Reserve Bank of India (RBI) governor, said Wednesday after the central bank raised benchmark rates for the first time since the Narendra Modi-led government came to power.

Traditionally, consumer prices would be the key gauges for Indias central bank to decide rate action. But the latest market volatility across emerging markets stoked expectations that Mint Street might intervene to stabilize the currency.

In the past few weeks, Indonesia and Turkey raised local rates to stop the plunge in local currencies. The Indonesian central bank raised its interest rates by 50 basis points in two tranches in the past three weeks. Last week, it called an extraordinary policy meeting as it struggled to stop the plunge in the rupiah, the local unit.

Such abrupt rate actions in those emerging economies have weighed on domestic markets. There was expectation that the RBI, too, would be following the same path to negotiate global uncertainties, with tightening rates in the US enhancing the safe-haven appeal of stateside assets.

The rupee has stood out as among the worst performing emerging-market currencies of late. It fell to 68.43 a dollar this year, close to its record low of 68.85 recorded in August, 2013.

“The Reserve Bank was seen intervening strongly to defend the rupees level as it neared the record low,” said a currency dealer from a private bank. Many market participants believed that the central bank had stepped in to arrest the rupees decline beyond 68, said the currency dealer.

The rupee gained about 0.32% to close at 66.93 a dollar on Wednesday.

Foreign portfolio investors have net sold around Rs 29,500 crore in domestic debt and equities this year, show data from the National Depository Securities.

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