While the RBI will intervene as needed to manage fluctuations in the rupee, it will not aggressively defend specific exchange rates
India’s central bank will be more judicious in its use of foreign exchange reserves to mitigate domestic currency market volatility amid strong global headwinds, three sources aware of the development said.
The Reserve Bank of India will continue to intervene as and when necessary to smoothen volatility, but won’t go against the tide and massively intervene to protect any levels, the sources said, asking not to be named as the discussions are confidential.
“Reserves were built for a rainy day and RBI has intervened when it has been necessary. But since Trump’s win, it is clear that there is no point in excessive intervention,” one of the three sources said.
The rupee has fallen by about 3 per cent against the U.S. dollar since Trump’s victory in early November, a sharp contrast to the near two years of relative stability.
“India has hardly had any foreign portfolio inflows for the last three months. RBI cannot keep defending the INR if the macros don’t support it,” a second source said. India’s foreign exchange reserves have declined by about $50 billion from early November levels.
The Reserve Bank of India did not immediately respond to Reuters’ request for comment.
The two sources also said newly-appointed Governor Sanjay Malhotra has been relatively less involved in day-to-day management of the currency, but is constantly in touch with various departments to ensure the rupee is moving in line with fundamentals.
“There is no question of trying to manage competitiveness as such, as India is not an export-oriented economy. We are more import-dependent, so it is important that the RBI does not allow runaway depreciation. So to that extent, they will be there in the market,” the first source said.
Several market sources confirmed that the central bank was making less frequent checks on banks’ market activities, and was allowing more flexibility in the size of the positions they can run and on arbitrage activities.
Source: www.thehindubusinessline.com