RBI says bond buying unrelated to rupee

To defend the rupee the Reserve Bank of India has been selling dollars, thereby draining rupee liquidity from the banking system, while infusing money through bond purchases commonly known as open market operations (OMO) to prevent the liquidity deficit from deepening.

But speculation arose last week that the RBI may conduct bond purchases less often, as the rupee steadied.

Subir Gokarn, the deputy governor responsible for monetary policy, warned against making such assumptions.

"I don't think you can directly correlate the rupee movement with the OMOs," Gokarn on sidelines of an industry event in Chennai, where the RBI's two-day board meeting began on Wednesday.

"OMOs are being driven by judgements about liquidity conditions and they will continue to be driven by judgements about liquidity conditions, whatever is causing liquidity stress, whether it is foreign exchange market or something else."

The rupee rose 5.1% through four trading sessions until Tuesday in line with regional peers but weakened about 0.3% on Wednesday to 54.55 to the dollar.

The RBI has bought Rs 59,101 crore of bonds since the fiscal year started in April, compared with a notified amount of Rs 70,000 crore.

Gokarn added that a high current account deficit has also weighed on the rupee and any improvement on the deficit will help the rupee recover and stabilise.

India's external balance also deteriorated sharply in the January-March quarter, with the current account deficit touching a record high of 4.5% of GDP and the balance of payments stuck in the red for the second straight quarter.