2012.06.08 15:57:50 UPDATE: India Central Bank Should Use Forex Reserves to Support Rupee - Adviser

-- Central bank should use forex reserves to support rupee, adviser says -- Forex reserves fall for fifth week, down $2.402 bln to $285.857 bln on June 1 -- Lower oil price reduces impact of weaker rupee on inflation, adviser says -- Sharper slowdown in growth, softer oil make room for rate cut, adviser says (Adds central bank data on decline in forex reserves in 6th paragraph) By Khushita Vasant MUMBAI--The Reserve Bank of India should use its more than $285 billion of foreign-exchange reserves to intervene in the currency market and arrest the rupee's slide, a senior adviser to the central bank said Friday, even as the reserves declined for a fifth straight week. The central bank's dipping into its reserves to support the local currency is justified at a time when India is buffeted by global headwinds and poor risk sentiment, Ashima Goyal, a member of the RBI's technical advisory committee, told Dow Jones Newswires. Members of the panel determine India's monetary policy formulation. "It's not that once you get [past] some threshold [of reserves], you should never use it. What have you got it for?," Goyal said. The central bank's frequent dollar sales have been eating into India's forex reserves. Data Friday showed the foreign-exchanges reserves fell by $2.402 billion to $285.857 billion in the week ended June 1. This is a sharp decline from $306.78 billion in early December. "If they [RBI] intervene using $20 billion, that's not a big deal. It should be done," Ms. Goyal said. The Indian rupee has been among the worst-performing Asian currencies, weakening nearly 10% against the dollar since mid-March. It hit a record low of 56.51 against the greenback on May 31. The rupee has been under pressure as India grapples to finance yawning fiscal and current-account gaps, which are driving investors away. Uncertainty in Europe and sluggish growth in developed economies also add to its woes. The RBI has a stated policy of intervening in the forex market only to smoothen volatility. It also doesn't target any exchange rates. To support the rupee, The RBI also imposed restrictions on forward currency trades and raised the interest-rate ceiling on foreign-currency deposits to lure more foreign money into the country. Some economists say the rupee's 10% fall over the past three months has made exports competitive, and eased monetary conditions by the equivalent of an at least 100-basis-point rate cut. While easing of monetary conditions should halt the call for an immediate rate cut, Ms. Goyal differs as, according to her, growth has slowed more than anticipated and inflation has softened. India's January-March GDP at 5.3% crawled at its slowest in nearly a decade, thanks to lethargic policy-making. She said the central bank now has some room to cut rates due to a fall in global crude-oil prices. India imports about 80% of its oil requirements. Along with high oil prices, rupee depreciation is worrisome as a weaker currency increases import costs. "Since oil prices are coming down, that reduces the impact of [the rupee's] depreciation on inflation," Ms. Goyal said. Write to Khushita Vasant at khushita.vasant@dowjones.com (END) Dow Jones Newswires June 08, 2012 09:57 ET (13:57 GMT)