The Rupee made a huge move today, after sitting below Rs. 64 for more than two months. The rupee is now at 65 (after market) and looks really weak.
This is not so much of a problem. RBI has been buying dollars as foreign investors came in. But they added so much money in the last three months that RBI was simply overwhelmed. Even as reserves head to all time highs of $371 billion, we saw the dollar plunge.
What happens now?
The rupee was strong primarily because RBI which usually buys in such times did not. But will RBI come in now? It doesn’t appear so. However there is a twist.
RBI did not buy dollars only because buying dollars would introduce more rupees into the system. And there are too many rupees in the system today (too much liquidity). So it makes no sense to try and buy a lot of dollars.
But the other side doesn’t apply. RBI could SELL dollars and that would serve the secondary and useful purpose of taking rupees out of the system. In doing so, it will reduce liquidity by taking rupees off the system, and also provide a layer of stability to the rupee.
We wouldn’t advocate interfering in markets but this is a good time to do the selling of dollar reserves to reduce rupee liquidity.
The rupee hasn’t made such a big move in this direction in a while, and neither have stock markets. So people are wondering: is this the big crash? Our answer is: Come on, it’s just a 1% day. These used to be normal! Hang on and see how it evolves. Lets talk when things are really out of a range.
