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If not for the Reserve Bank of India's four-month absence from the rupee market, it would have been difficult to notice authorities have slowly allowed larger gyrations in the currency and minimised their interference.
The RBI did not intervene in the rupee market from December 2009 to March this year -- their longest hiatus since mid-2006.
Their limited interventions in April also suggest that the central bank is inclined to step in these days only when the rupee moves a percent in any direction on any day, unlike in the past when a 0.2 percent move could prompt intervention.
Below are questions and answers on the Reserve Bank of India's currency policy, based on discussions with three central bank officials who could not be identified by name.
HAS THE RBI CHANGED ITS FX STANCE?
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It's a subtle shift, discernible merely in the threshold for intervention. The central bank says it intervenes to smooth out volatility and it is not uniquely concerned with the level of the rupee or whether it is weakening or strengthening.
The central bank takes into account factors including the dollar's performance against global majors, movement of Asian currencies and India's monetary policy when assessing rupee volatility.
Central bank officials say they will only intervene if the rupee's movement is not based on fundamentals but mostly on speculation.
In the current context, when the market is uncertain over possible contagion from Greece, rupee volatility has been in line with Asian peers and the dollar's moves against the majors, and has thus not merited any strong intervention, RBI officials say.
For instance, on Feb. 5, the central bank stayed on the sidelines, even as the Indian unit dropped by 1 percent, because that was in line with the euro's fall to its lowest level since May 2009.
HAS THE RBI'S TOLERANCE FOR RUPEE VOLATILITY INCREASED?
On the surface, yes.
In 2006, the central bank intervened in currency markets when intraday movement was as moderate as 10 paise, or one-tenth of a rupee.
But its tolerance for volatility started to increase from 2008 when the global financial crisis roiled markets. It intervened regularly in the forex markets in 2008 and 2009, but it allowed for far greater fluctuation in the rupee before stepping in.
For a chart showing rupee gyrations, click here
