Market to determine exchange rate |03 November 2008
In an interview on Saturday, Caroline Abel, head of monetary analysis and statistics at the
“Before, the Central Bank was prescribing a set of rates and submitting them to the commercial banks. These were the rates the banks and bureaux would use for transactions,” she said.
She said the market was closed during the weekend, but today the rate will be determined by the demand for and supply of foreign currency in the system, and it will move during the day.
“It will not be a single rate on any day. It will move during the day and it can be different across the various banks and bureaux de change,” she said.
Miss Abel said someone wanting foreign exchange today, for example if they are travelling, can go straight to a bank or a bureau de change.
“You will see the price that you have to pay. The main indicator will be the price and it will depend on whether you can pay – if you have the liquidity in rupees. If you are converting your foreign exchange it will also be dependent on whether you are happy with the price that the financial institution is offering you for your forex,” she said.
“You will not be required to produce an airline ticket. Previously we gave guidelines to the banks, but with the change in the foreign exchange regime and in the legal framework the Central Bank is no longer prescribing to the banks, telling them what they should do or not do with the foreign exchange they have in the system.
“You will not have to produce a travel ticket. Likewise the US $400 limit also goes. If you want US $100 or US $1,000, you just ask.
“The main factor will be the price which, as I said earlier, could change during the day. Someone might go in the morning and get a certain amount of foreign exchange, another person goes later to the same bank for the same amount of foreign exchange but pays more or less.”
Miss Abel said the Central Bank will not have an active administrative role although it will be monitoring what is going on. The bank will rather concentrate on having a very strong monetary policy.
“We have our prescribed target, especially on liquidity growth in the system. Based on what goes on in the market we will be intervening, not necessarily in the foreign exchange market but more on the interest side,” she said.
“This is where our main role is now under the new system – to have a much stronger monetary policy based on the money reserve targeting, which is the power of creating money in the system. This is our main focus now.”
Asked why the Bank was not giving an indication of what level to expect, as some people were asking, Miss Abel said it no longer has the power to fix the foreign exchange rate and cannot, therefore, influence the rate.
“The market will decide. The Central Bank forms part of the financial system but as a policy agent, not giving rates to the system,” she said.
“It should leave the rest of the agents in the system to determine that rate. It will depend on the financial institutions themselves and those coming to buy or convert their foreign exchange; this is where the prices will come out and this is where the Central Bank will get its information to make policy decisions on whether we are on the right track.”