The Hindu Business Line : Rupee closes at 41.17 on lower inflation target

The rupee closed to yet another high of 41.17, reacting to the annual monetary policy statement of the RBI. The rupee went from strength to strength during the day. It opened at 41.65 and touched an intra-day high of 41.05 to finally end the day at 41.17 against Monday's close at 41.67/68. Market participants said all-round selling of dollars buoyed the domestic currency to touch a level it has not seen since May 1998. "The primary focus of the RBI's monetary policy is to contain inflation and this means that the central bank may not intervene to create excess liquidity in the system," said the chief currency dealer at a private bank. The RBI has reduced the inflation target to 5 per cent in 2007-08 and set a range of 4 to 4.5 per cent over the medium term.

On the recent strength of the rupee, Dr Y.V. Reddy, Governor, RBI, was guarded at a press conference. "In many human relationships and economic relations, it is easy to insist one is not unhappy but difficult to affirm that one is happy", he said. .

"This time round, the monetary policy has completely focused on the exchange rate. The measures are aimed at arresting foreign currency inflows and accelerating the outflows which would bridge the demand - supply gap and depreciate the rupee," said Mr Moses Harding, Executive Vice President, IndusInd Bank.

He added increasing the outflow limits would not however make a significant impact as existing concessions lay unutilized. Besides Indian companies would not invest abroad at lower returns at the risk of a depreciating rupee. "The RBI has not announced an interest rate hike as it will tighten liquidity and cause further appreciation in the rupee," Mr Harding said.

Mr Mohan Shenoi, Group Head, Treasury, Kotak Mahindra Bank said, "Despite RBI announcing measures to relax foreign currency outflows, there is no diminishing of our view that foreign currency inflows will be robust and will continually pose a challenge to RBI so far as liquidity management is concerned."