The RBI’s liquidity management operations are unrelated to exchange rate movements, a deputy governor said on Wednesday, following speculation that the bank could buy bonds less frequently as a weak rupee began to show signs of recovery.
To defend the rupee the Reserve Bank of India has been selling dollars, thereby draining rupee liquidity from the banking system, while infusing money through bond purchases commonly known as open market operations (OMO) to prevent the liquidity deficit from deepening.
But speculation arose last week that the RBI may conduct bond purchases less often, as the rupee steadied.
Subir Gokarn, the deputy governor responsible for monetary policy, warned against making such assumptions.
“I don’t think you can directly correlate the rupee movement with the OMOs,” Gokarn on sidelines of an industry event in Chennai, where the RBI’s two-day board meeting began on Wednesday.
“OMOs are being driven by judgements about liquidity conditions and they will continue to be driven by judgements about liquidity conditions, whatever is causing liquidity stress, whether it is foreign exchange market or something else.”
The rupee rose 5.1 percent through four trading sessions until Tuesday in line with regional peers but weakened about 0.3 percent on Wednesday to 54.55 to the dollar.
The RBI has bought 591.01 bln rupees of bonds since the fiscal year started in April, compared with a notified amount of 700 bln rupees.
Gokarn added that a high current account deficit has also weighed on the rupee and any improvement on the deficit will help the rupee recover and stabilise.
India’s external balance also deteriorated sharply in the January-March quarter, with the current account deficit touching a record high of 4.5 percent of GDP and the balance of payments stuck in the red for the second straight quarter.
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