Rupee recovers to 66.83 per dollar as Raghuram Rajan takes over RBI

Around noon on Wednesday, Raghuram Rajan walked into an 18th floor office in Mumbai to take over as the new Reserve Bank governor, the Indian rupee was staging a dramatic recovery to pull back below 67 per dollar, after hitting 68.60 in early trade.

Dealers told Reuters that the partially convertible rupee jumped over 1 per cent to 66.83 as against Tuesday's close of 67.63 on account of the Reserve Bank of India or RBI aggressively selling dollars to prevent the currency from falling to a record low. The central bank was seen selling dollars consistently when the rupee would approach the record low of 68.86 hit on August 28, traders said.

The rupee also got a sentimental boost after the RBI partially relaxed some of the capital outflows restrictions imposed last month. Companies raising ECBs (external commercial borrowings) will be allowed to invest up to 400 per cent of their net worth abroad, the central bank said. (Read more)

And amid all that activity, was the hope that Mr Rajan will bring a new approach to the central bank's defence of the rupee, which has so far relied on a risky strategy to drain cash and raise short-term interest rates, traders said.

"Whenever the RBI moved out of the market, we saw a sudden uptick in dollar-rupee and they again came in to sell. They have been very aggressive today," a senior dealer with a state-run bank said.

Mr Rajan enters office as the economy struggles with decade-low growth, a record current account deficit and a steep fiscal shortfall. The worries about the sluggish economy, and a lack of confidence in how policymakers have addressed it so far, have pummelled the rupee. (Read: The challenges before Rajan)
 
"The rupee will be Rajan's first and key challenge. His IMF aura may help but he will need to win the market's faith by announcing something which helps bring in dollar inflows," said Vikas Babu Chittiprolu, a senior foreign exchange dealer at state-run Andhra Bank. (Read: What awaits Raghuram Rajan: Falling rupee, high current account deficit)
 
The big question is whether Mr Rajan, who most recently was an advisor at the Finance Ministry, will take the helm of the RBI with a whisper or a bang, and whether he will dismantle any of the mishmash of current central bank measures.
 
(With inputs from Reuters)