Is RBI letting rupee rise to keep CPI inflation under lid?

NEW DELHI: The recent lack of intervention by the Reserve Bank of India in the foreign exchange market, which enabled the rupee to appreciate to its highest levels since March, was a "conscious" choice, one that could help the central bank with its objective of combating inflation, a banking industry source said.

"The RBI never targets a particular level of the rupee, but needs the exchange rate to reflect fundamentals and a fair picture of the economy...This shows where the rupee can go if RBI is not in the market," the source said. "That message has been sent."

On Monday, the rupee rose 0.7% to settle at 74.3100 a dollar, its highest close since Mar 18. The domestic currency was at 74.33 per dollar today.

The rupee strengthened on Monday because stop-losses were triggered on dollar holdings after the

RBI did not intervene near the 74.75rupees-per-dollar mark, a level where it, according to currency dealers, had persistently purchased the greenback earlier.

If the RBI continues with its hands-off approach, the rupee is expected to rise to 73.75 per dollar over the next two to three weeks.

The RBI is believed to be banking on more non-monetary tools to bring inflation within the tolerance zone of its Monetary Policy Committee, and the appreciation of the rupee seems to be a part of this toolkit.

Crude oil and gold, both of which are imported heavily by India, had been the two factors that had contributed to the rise in inflation in recent months, the banking industry official said.

The August resolution of the Monetary Policy Committee and minutes of comments by individual members too had raised this point.

"Rupee actions aid the anti-inflation measures. It will be in small measures but the fight will now begin," the source said, adding, "Most of the actions at this point will be through non-monetary policy tools." Since May, the central bank has heavily bought dollars to check the rupee's rise and bulk up its own foreign exchange reserves.

Consequently, the rupee has emerged as a laggard in the Asian currency basket.