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“In India, the RBI does not target any exchange rate. We intervene in the foreign exchange market only to manage the volatility and to manage the disruption to the macro economic situation,” RBI governor Duvvuri Subbarao said.
The rupee weakened below 57 to the dollar on Friday to approach a record low hit about a year ago.
Subbarao said: “The important point is that we have to be internally sure that when we enter market we are credible because for a central bank failed defence of exchange rate can be quite detrimental.
“When you have downward pressure on the rupee as I said you have to shell your dollars. And a fair defence of the exchange rate can be worse than no defence.”
The rupee on Friday was trading at 57.06/07 to the dollar.
The Indian currency hit a record low of 57.32 against the dollar in June last year.
On the widening Current Account Deficit, Subbarao said there are three concerns about India’s CAD – these are quantum of CAD, quality of CAD and financing the CAD.
The increase in the deficit above the sustainable levels year-on-year is certainly going to add the pressure, he said.
The RBI governor also said on Friday that its monetary actions in the coming months will be determined by the monsoon outlook and ensuing impact on inflation.
“And most importantly we also chase monsoon like millions of farmers across the country. So, the monsoon outlook, the monsoon performance is going to be the important factor in determining the RBI policy in the next three months,” Subbarao said.