Blames Eurozone debt crisis, uncertain global environment

Even as the rupee slumped to a historic low at 52.73 against the United States greenback during intra-day forex market trade, the government on Tuesday maintained that intervention by the Reserve Bank of India (RBI) would not be able to arrest the slide, mainly because the crux of the problem lay in the pull-out of funds by foreign institutional investors (FIIs), triggered by the Eurozone sovereign debt crisis and the uncertain global economic environment.

In an interaction with the media on the rupee hitting an all-time low, which is sure to exert an additional inflationary pressure on the economy at a time when the government is at pains to contain the price spiral, Finance Minister Pranab Mukherjee said: “RBI intervention [in the foreign exchange market] will not help … The increased uncertainty in the Eurozone on account of the sovereign debt crisis has led to shifting of capital from Europe to the U.S. which has hardened the U.S. dollar against most currencies.”

Mr. Mukherjee said that the rupee depreciation was essentially on account of FIIs withdrawing from the domestic bourses and that the global uncertainty was adding to the exchange rate volatility. Such is the capital outflow scramble to get to safer havens that FIIs have pulled out $ 460.40 million in five days since November 15.

Mr. Mukherjee, however, held out an assurance that the Central bank was “closely” monitoring the situation and “will take the required action in light of the international developments as the situation unfolds”.

In the wake of the Finance Minister's assurance, the Indian rupee managed to recover marginally and settled at 52.29/30 to the U.S. dollar, marking a 15-paise drop from its previous closing.

The RBI described the rupee fall as “disruptive”, but was yet to decide as to when it would intervene to stem the slide. “Our policy is that if the macro-economic situation is impacted due to the exchange-rate fluctuation or undue volatility, we will have to intervene. We are yet to decide whether to intervene or not at the moment … [The Central bank] will intervene when it is consistent with the policy. But in real terms I cannot tell [as to when the apex bank will intervene],” RBI Governor D. Subbarao said in Hyderabad.

The Finance Ministry said the RBI and the government were monitoring the situation.

“The RBI and government are monitoring the issue. While the movement of the rupee is determined by market forces, whenever there is excessive volatility, the RBI will intervene as the situation warrants. RBI will take action as required,” Finance Secretary R.S. Gujral said on the sidelines of a conference at Agra.

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