Reserve Bank will intervene in the forex market only to curb excessive volatility in exchange rate but stated there is no target set for rupee, deputy governor Subir Gokarn said here today.
"Our approach has been that the exchange rate of the rupee should be market determined and the Reserve Bank should be intervening only to manage excessive volatility... without targeting any particular level or band," Gokarn told an RBI-ADB conference on 'Managing capital flows' here.
From a short-term perspective, the decision to intervene in order to avoid destabilisation of both exporting and import-competing producers needs to be viewed in the overall context of domestic conditions.
He further said the RBI policy has been articulated as broadly "non-interventionist", except when confronted with excessively volatile and lumpy or disruptive flows.
He also said the policy on intervention not only aims at quelling the excessive volatility, but also attempts to
moderate speculative one-way downward movement of the rupee.
The rupee was the worst performer amongst the 25 leading global currencies last month losing over 4.2 per cent. Since September 2011, rupee has lost 19 per cent and has been the second worst performer amongst the BRIC currencies year to date after the Brazilian real.
Today, however, the local unit gained 10 paise to end at 55.06 to the dollar against a two-month low it hit last Friday at 55.16. In late June this year, the rupee sunk to its life-time low of 57.15.
Talking about lessons learnt from volatile capital flows, Gokarn said the drivers of the currency volatility become more dominant if current account deficit is high.
Therefore, "addressing the domestic drivers of currency dynamics holds key to rupee stabilisation," he said.
On corporates concentrating on forex gains to boost profits, Gokarn said, companies should be concentrating more on their core business to generate returns rather than looking to generate profits from diversifying into trading in forex markets.
Incidentally, many companies and even banks reported good bottom lines in the second quarter which was partly attributable to gains made by them in forex market.
He also said banks are expected to show caution while offering forex derivatives to companies as firms enter into such transactions without fully understanding the downside implications of such deals.