Rising imported inflation and foreign exchange volatility risks support the case for greater intervention into the forex market by Indian central bank Reserve Bank of India (RBI), said a report Wednesday by research unit of Standard Chartered.
Indian rupee has depreciated around 9.5 percent against U.S. dollar from its low of 43.86 in later July 2011 and led losses among Asian currencies except Japanese yen, said the report.
RBI's hands-off stance and greater tolerance for exchange rate movement have made Indian rupee more vulnerable during periods of risk aversion, warned the report.
The report added, "In the face of outflows of foreign institutional investors and India's trade deficit, the RBI's absence from the forex market has only fuelled investor pessimism towards Indian rupee."
However, downside pressure remains strong and one-off intervention may not be enough in an environment of growing contagion risks, the report said.
An escalation of contagion risks that led to financial stability concerns would considerable alter RBI's practice.
In the case, liquidity concerns would take a backseat and the RBI would respond strongly to upside momentum, predicted the report.