India’s new central bank governor, Sanjay Malhotra, appears willing to let the rupee move more freely against its regional peers while continuing to intervene to curb high volatility, according to a Bloomberg report citing people familiar with the matter.
Malhotra, who took office in December, took a close look at the Reserve Bank of India’s (RBI) monetary intervention strategies ahead of its first monetary policy meeting in February.
Under his leadership, the RBI could allow greater flexibility in daily currency fluctuations, breaking with the tighter controls maintained by his predecessor, Shaktikanta Das. During Das’ six years in office, the rupee’s volatility was among the lowest in emerging markets, and the RBI amassed more than $700 billion in foreign exchange reserves to defend the currency.
The rupee recently fell to a record low of 86.7025 against the dollar before recovering slightly. The decline comes as foreign capital outflows intensify, with investors withdrawing $2 billion from stocks and $705.5 million from fixed income this year. Rising oil prices and a stronger dollar have also put pressure on the currency.
This policy change partly responds to complaints from exporters that the stability of the rupee hurts trade competitiveness. Exporters argued that rival countries were allowing their currencies to depreciate, thereby strengthening their trade advantages. The rupee’s real effective exchange rate reached 108.14 in November, an overvaluation of 8%, prompting calls for a more flexible approach.
Even as it allows a deeper depreciation, the RBI remains cautious about India’s import bill, which is heavily influenced by oil costs, with the country importing 90% of its crude. The central bank plans to closely monitor speculative positions and intervene decisively if necessary to avoid excessive fluctuations.
