The Reserve Bank of India (RBI) was forced to intervene in the foreign exchange (forex) market on Thursday after the rupee fell to an all-time low of Rs 54.32 per dollar in the morning trade.
With the RBI selling dollars in the market at Rs 54.10, the value of the rupee recovered to Rs 53.76 in the evening but this was still below the historic low of Rs 53.71 that the Indian currency had touched on Wednesday.
The RBI action came as Finance Minister Pranab Mukherjee gave a clear signal on Thursday that the government would have to take short-term measures to restore market confidence.
Forex dealers said sustained demand for the greenback from banks and importers and persistent foreign capital outflows from the stock markets have led to a continuous decline in the value of the rupee, which had touched a 34-month high of around Rs 44 per dollar in July this year.
"It is important for us to strike a fine balance between the short-run and the long-run policy issues and options to help restore market confidence. The present indicators show that both private consumption
and investment sentiments have weakened and it is this weakening of sentiments that makes it necessary to shift some of our focus back to near-term issues, even as we recognise that some structural imbalances
remain to be addressed," Mukherjee said.
According to sources, this could also be an indication that the RBI would have to ease up on its tight money policy in order to reduce interest rates and revive demand.
However, food inflation, which has started easing, would give the central bank more elbow room.
Mukherjee has said in recent months that while recovery in the advanced economies is showing signs of stalling, there is slowdown in the emerging economies, which does not augur well for the global economy. He said that it is becoming one of the most challenging periods for policy makers around the globe.
"The conditions in the advanced economies have inevitably transmitted to developing economies through various channels, including loss of demand for exports, volatile fund flows and fluctuating commodity prices," he said.
The minister said in this context "it is necessary for policy makers to send clear signals, mindful of the fact that our options today are much more limited". He said the real danger to the global economy lies in the rapid contagion possible through today's globally integrated financial markets.
Mukherjee added that innovative remedies would be required to address these challenges.
In recent months, the government has sought to unlock economic bottlenecks through initiatives such as the National Manufacturing Policy, permitting greater foreign direct investment (FDI) in the retail sector, Direct Taxes Code, Goods and Services Tax and various legislations, including in the financial sector, Mukherjee stated.Courtesy: Mail Today