Corporate India, which is already grappling with a high interest rate scenario, could further be hit by a liquidity crunch if the Reserve Bank of India (RBI) decides to step-in to contain the falling rupee by selling dollar.
Analysts said that this could further dampen investment scenario. The central bank has already increased interest rates for 13 times in the last 19 months. The central bank may have to soak up rupee in an attempt to arrest with fall against the dollar. On Wednesday, however, the rupee recovered from a low of 52.73 to trade at 52.12 per dollar.
Finance minister Pranab Mukherjee said that the RBI is closely monitoring the current rupee situation. He said that the central bank will do the needful. “RBI’s intervention could impact liquidity but it is a minor issue given the overall situation, what is more important is the question of proportion of the reserves that is committed and whether it would actually arrest the falling rupee and what would be the outcome if it does not succeed,” Suman Bery, member of the Prime Minister’s Economic Advisory Council told HT.
“The rupee is reacting to the current demand and supply scenario but one has to wait and watch if RBI intervenes but if it does then it would impact liquidity,” DK Joshi, chief economist, CRISIL told HT.
However, all eyes are set on the eurozone crisis. In case the crisis shows signs of easing, it could help in arresting the falling rupee without any intervention from the RBI or the government.
Mukherjee also said that India’s growth and fundamentals are strong and they look more attractive in a world confronting problems, though he admitted that the volatility in the rupee is keeping investors nervous.