India’s New Central Bank Governor Signals Potential Changes in Currency Intervention Strategy

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India’s New Central Bank Governor Signals Potential Changes in Currency Intervention Strategy

India's new central bank governor, Sanjay Malhotra, has indicated a willingness to adopt a more flexible approach towards the rupee's exchange rate against regional currencies. Since assuming office in December, Malhotra has been evaluating the Reserve Bank of India's currency intervention strategies, with a focus on potentially allowing greater daily fluctuations in the rupee's value. This departure from the previous governor's, Shaktikanta Das, relatively tighter controls aims to address concerns raised by exporters regarding the rupee's stable value impacting their competitiveness in global trade.

During Shaktikanta Das's six-year tenure, the rupee's volatility remained among the lowest in emerging markets, with the RBI accumulating substantial foreign exchange reserves exceeding $700 billion. However, the recent decline of the rupee to a record low against the dollar, coupled with foreign outflows from equities and fixed-income securities, has prompted a reevaluation of the currency intervention strategy. The pressure on the rupee is further exacerbated by rising oil prices and a stronger dollar, leading to concerns about the currency's stability and competitiveness in international trade.

Responding to criticisms from exporters about the rupee's overvaluation and lack of competitiveness compared to other regional currencies, the RBI under Malhotra's leadership is expected to adopt a more flexible exchange rate approach. This includes allowing for a certain degree of depreciation to enhance India's trade advantages. However, given India's heavy reliance on oil imports, the central bank remains cautious about potential impacts on the country's import bill. Monitoring speculative positions closely and intervening decisively when necessary are part of the RBI's planned measures to prevent excessive currency swings and maintain stability in the foreign exchange market.