Rupee to Gain Flexibility Under New Central Bank Governor

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Rupee to Gain Flexibility Under New Central Bank Governor

India's New Central Bank Governor to Allow More Flexibility in Rupee Movement

India's newly appointed central bank governor, Sanjay Malhotra, is reportedly planning to loosen the reins on the rupee's movement against regional currencies. This shift in policy comes after exporters voiced concerns about the rupee's stability hindering their competitiveness.

Malhotra, who assumed office in December 2023, has been reviewing the Reserve Bank of India's (RBI) currency intervention strategies ahead of his first monetary policy meeting in February. Under his leadership, the RBI may allow greater flexibility in daily currency fluctuations, marking a departure from the tighter controls implemented by his predecessor, Shaktikanta Das.

During Das's six-year tenure, the rupee witnessed remarkably low volatility compared to other emerging markets. The RBI also amassed over $700 billion in foreign exchange reserves to defend the currency. However, the rupee recently hit a record low of 86.7025 against the dollar before recovering slightly. This decline is attributed to intensifying foreign outflows, rising oil prices, and a stronger dollar.

The policy shift is partly a response to exporters' complaints about the rupee's stability hurting their trade competitiveness. Exporters argued that rival nations allowed their currencies to depreciate, giving them an edge in trade. The rupee's real effective exchange rate reached 108.14 in November, indicating an 8% overvaluation, further prompting calls for a more flexible approach.

Despite allowing greater depreciation, the RBI remains cautious about India's import bill, which is heavily influenced by oil costs as the nation imports 90% of its crude. The central bank plans to closely monitor speculative positions and intervene decisively if needed to prevent excessive swings in the rupee's value.