Opinion RBI shores up rupee. It may be good to let it be

On Wednesday, the Indian rupee registered its best gain against the US dollar in seven months following an intervention by the Reserve Bank of India. As a result of the RBI selling dollars, the rupee’s exchange rate versus the dollar rose by over 1 per cent during the day. By the close of day, the rupee had gained 0.7 per cent over the dollar and the exchange rate had shifted from 91.05 to a dollar to 90.09 to a dollar. The RBI’s intervention in the form of a massive sale of dollars, increasing the relative supply of dollars vis-à-vis the rupee and boosting the relative price of the rupee, came in the wake of a sharp fall in the rupee’s exchange rate versus the dollar. Before this intervention, the rupee had lost more than 6 per cent of its value over the past year — almost two to three times the rate at which the rupee has historically lost value relative to the dollar. The rapidity of this fall was particularly sharp as the rupee lost 3 per cent relative to the dollar since November 15.

At one level, the RBI’s intervention is nothing new, and is understandable. In the most recent monetary policy review on December 5, RBI Governor Sanjay Malhotra sounded sanguine about the rupee’s exchange rate trajectory as he delineated the RBI’s approach. “Our stated policy, always, has been that we allow the markets to determine (the value of rupee). We don’t target any price levels or any (price) bands… Our effort always has been to reduce any abnormal or excessive volatility and that is what we will continue to endeavour,” he said. There are no set definitions of what constitutes “excessive” fluctuation, but it is noteworthy that the rupee slid from 90 to 91 in a matter of just 10 days. There is always a risk that a sustained sharp fall turns into a panic and becomes self-fulfilling.

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With India’s domestic inflation being below even the RBI’s comfort zone and with crude oil prices staying subdued, this is as good a time as any for the RBI to let the rupee depreciate against the dollar — since a weaker rupee will not result in spiking domestic inflation to uncomfortable levels. RBI interventions can only achieve the goal of moderating fluctuations in the rupee’s exchange rate. They cannot be, and should not be, the way forward for an economy that is open to trading globally. Eventually, the rupee’s true value can only be determined by the ground realities of how much India exports and imports and how well it attracts global capital flows.