The Reserve Bank of India will use all available tools to stem a fall in the rupee if the currency's downward spiral escalates and will take steps to keep liquidity in the country's markets at comfortable levels, a deputy governor said Saturday.
The partially-convertible rupee has fallen around 16.5 percent from a 2011 high in July as risk-averse investors flee emerging markets, increasing worries for a government hit by high inflation, slowing growth and a widening trade gap.
We do have the instruments and the capacity to enhance the supply of foreign exchange into the markets, and as demonstrated by the recent actions, will use them as appropriate, Subir Gokarn told a conference in Mumbai. If we do see the short-term risk of a downward spiral escalating, we will not hesitate to use all available instruments, he added.
The currency snapped a four-week losing trend Friday after weakening by 6.7 percent in November, its biggest slide since at least January 1995.
The RBI will also continue to inject liquidity into the country's markets, Gokarn added, to ensure smooth functioning of the financial markets given the bank's forecast for tight conditions in the near future.
Currently, the Indian banking system holds government securities to the tune of 29 percent of net demand and time liability which is above the statutory requirement of 24 percent, Gokarn said. This reflects a relatively large capacity for liquidity infusion as and when the need arises.
We have been injecting liquidity into the market through the liquidity adjustment facility and open-market operations, and we will continue to do so as conditions warrant, he added.
The RBI said Thursday that it bought 57.83 billion rupees worth of bonds through open market operations, a week after buying 94.35 billion rupees through the same process.