Amid a volatile year for the rupee, the Reserve Bank of India reiterated its position on Monday that the central bank is open on intervening in the currency market - not to fix the rate but to curb volatility.
"While the policy does not target any particular level of exchange rate, RBI is well aware that any sharp movement of a unidirectional nature has a tendency to fuel further expectations of depreciation," said Subir Gokarn, deputy governor, RBI. "Therefore, the intervention policy not only aims at quelling the excessive volatility, but also attempts to moderate speculative of one-way downward movement of India rupee,"
The rupee has fallen nearly 3% against the US dollar over the past one month as global risk aversion has increased due to concerns over the approaching US fiscal cliff.
The central bank does not say whether it intervenes in the currency markets and publishes data on its foreign-exchange transactions after more than a month.
Gokarn said that addressing domestic drivers of currency dynamics holds key to financial stabilisation. "The drivers of currency volatility become more dominant if current account deficit are high," he said.
The country's current account deficit, as a proportion of gross domestic product, slipped to 3.9% in the April-June period from 4.5% in the January-March quarter. But it still remains outside the central bank's comfort zone of 2% to 3%.
He said that corporates, in general, should be concentrating more on their core business to generate returns rather than looking to generate alpha from diversifying into trading in forex markets.
The Indian currency has witnessed sharp volatility since the start of this year. Starting the new year at 53.30 against the US dollar, it depreciated to the 56-levels at the end of May and again strengthened to 51.74 against the green back on October 4. On Monday, it closed at 55.06, a rise of 10 paise against the dollar.