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Decimal Digest
12 Dec 2011

RBI Intervention in Rupee Market

Since we wrote about the state of Indian Rupee a few weeks ago, the free fall of the Indian Rupee continues unabated, in spite of successful auction of FII Debt limits for USD10 billion, which have to be utilized in next 80 odd days.

The chart below shows our proprietary Index of RBI intervention in Forex Market. The graphic clearly depicts that we are at intervention levels similar to the post-Lehman days in late 2008 / Early 2009.

An Index level of +100 indicates an all out effort by the RBI to prevent an appreciation of the Rupee. A level of „0‟ indicates no intervention, and a level of -100 indicates consistent effort to prevent Rupee depreciation.

The current level of intervention matches the worst period of the 2008-09 crisis. We still do not know if we are past the peak of the euro zone debt crisis or whether the situation is going to worsen further. If the situation in Europe worsens further, we may see that the Indian Rupee will depreciate pretty rapidly or RBI will be forced to increase the intensity of its intervention. Domestic factors – rapidly slowing growth, high fiscal deficit, high inflation, and policy intransigency shown by various political parties - are not helping matters at all. In such a situation, if the RBI cuts rates or reserve ratios, the Indian Rupee is set to be bruised further.


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