The RBI has decided to buy dollars to boost exports in order to lower the current account deficit, which had registered a record increase past year.

A couple of months ago, the central bank had to sell huge amounts of dollars to thwart the fall of rupee and to lure global investors who were disenchanted because of a deteriorating economy.

 

In order to create a foreign exchange reserve buffer the RBI is resorting to this curative model Economists believe, dollar purchase will also protect exports from getting hit by weakening emerging market currencies.

 

RaghuramRajan, ever since he joined as RBI governor, oversaw the strengthening of rupee by around 4%. 

Disturbingly, exports shrunk in February after a seven-month expansion run, the sources revealed. Prospects of a stable administration after the elections have put the traders on cloud nine, which has a cascading effect: adding to rupee gains as foreign investors have dashed in, driving stocks to successive records.

 

With global slowdown and China devaluing Yuan to lift sinking exports as national growth decelerates, RBI may have little options left.The slump in the currency last year helped resuscitate exports and contain imports as they became costly. Restraints on gold imports also minimised the current account deficit.

 

The rupee was 0.2% lower on Tuesday, near a seven-month high of 60.75 to the dollar. It was the worst-performing major emerging market currency last year, when it fell to a low of 68.84 to the dollar on August 28.