Daijiworld Media Network- Mumbai

Mumbai, Jan 15: The Reserve Bank of India (RBI) will maintain its policy of intervening in the currency markets to curb excessive volatility as part of its broader macroeconomic management strategy, despite reports suggesting a more "flexible approach."

On Tuesday, the rupee closed at a new low of 86.63 against the dollar, down from its previous close of 86.58, after touching an intraday low of 86.65. Reports from Reuters and Bloomberg indicated that the central bank, under new Governor Sanjay Malhotra, had signaled greater flexibility, further pressuring the rupee.

Dealers noted that the non-deliverable forward (NDF) market played a significant role in the rupee's depreciation. In this market, participants speculate on the future exchange rate of the rupee without trading the currency directly, settling their contracts in dollars based on the rupee’s actual exchange rate at maturity. This speculation forces banks to buy dollars to manage their exposure, exacerbating pressure on the currency.

Over the years, despite pressure from the United States and international agencies, the RBI and the government have consistently adhered to their approach to managing currency volatility.

Policy considerations

Although data indicates that the rupee is overvalued against a basket of currencies, the RBI's strategy aims to maintain price stability for key imports like petroleum and edible oil, critical for an economy heavily reliant on imports. A weaker currency could exacerbate inflation, particularly at a time when the central bank is committed to anchoring retail price inflation near its 4% target.

In the past four months, the RBI has aggressively intervened in currency markets, using its foreign exchange reserves to support the rupee against a strengthening dollar. As a result, India’s foreign exchange reserves dropped from over $705 billion in September to $635 billion by December.

This intervention has also impacted liquidity, as the RBI has infused dollars into the market in exchange for rupees, drawing criticism for potentially increasing interest rate pressures.

While a weaker rupee can benefit exports, its impact is contingent on other currencies moving in a similar direction. Meanwhile, the dollar continues to dominate, with the dollar index firm at 109.5.

Coordination with the centre

The central bank's role in managing interest rates and exchange rates aligns closely with the government’s overall strategy. Reports suggest that the US dollar could remain strong due to potential tariff hikes under the incoming Donald Trump administration, as noted by Bloomberg. This underscores the need for a coordinated approach to monetary and fiscal policy in India.