MUMBAI: India’s central bank will tolerate a weaker Indian rupee as the country’s external sector confronts multiple headwinds including a wider trade gap and stalling of dollar inflows into the world’s fifth-largest economy, three sources familiar with the central bank’s thinking told Reuters.
The Reserve Bank of India (RBI), which had supported the rupee through aggressive interventions via dollar sales until last month, has allowed the rupee to fall 1.3% in the last seven trading sessions to a record low of 90.42.
The Indian rupee, down 5.5% on year, is Asia’s worst performing currency.
By signaling tolerance for a weaker rupee, the central bank is indicating that it will intervene mostly to curb sharp volatility or on any signs of a speculative build-up but not defend any specific level on the rupee, the sources said.
“It doesn’t make sense to spend reserves when fundamentally everything is against the currency,” said one of the sources, who commented on condition of anonymity as they were not authorised to speak to the media.
The RBI did not immediately respond to an email seeking comment.
“As and when fundamentals and real dollar demand dictates, the central bank does let the rupee move more than it normally would,” the second source said.
India is one of the worst hit markets in terms of outflows, with foreign investors selling stocks amounting to $17 billion so far this year. At the same time, foreign direct investment, trade, and offshore fundraising flows have slowed down.
While the currency’s fall below the psychologically important 90 per dollar mark has garnered attention and could embolden speculators, the central bank can step in to stamp those out as needed, a third source said.
