New Governor Advocates for Market-Driven Exchange Rates
India’s newly appointed Reserve Bank of India (RBI) Governor, Sanjay Malhotra, is signaling a shift towards a flexible rupee approach. Malhotra, who assumed office in December, has shown a willingness to allow the rupee to align more closely with market forces while intervening only to curb excessive volatility. Insiders reveal that the governor has held extensive meetings with various departments at the RBI to familiarize himself with key operational aspects, including currency intervention mechanisms.
Sources suggest that Malhotra expressed no objection to the rupee’s recent depreciation and is open to a policy shift that might permit broader day-to-day currency fluctuations. While maintaining the central bank’s focus on preventing speculative attacks and avoiding specific currency targets, this approach reflects a more balanced stance between market dynamics and intervention.
Contrasts with the Previous Administration
This strategy marks a contrast to the tenure of former governor Shaktikanta Das, under whom the rupee’s volatility was among the lowest in emerging markets. Das’s leadership saw the RBI amass over $700 billion in foreign exchange reserves, which were strategically used to defend the currency. However, this tight control also led to concerns of overvaluation, with the rupee’s real effective exchange rate (REER) reaching a record 108.14 in November, indicating an 8% overvaluation.
Since Malhotra’s appointment, the rupee has declined by 2% against the dollar, with one-month implied volatility reaching a year-long high. The currency also breached the symbolic 86-a-dollar mark, driven by external pressures such as a strong US dollar and rising global oil prices. Exporters have voiced concerns about the impact of a stable rupee on their competitiveness, prompting the RBI to reconsider its interventionist approach.
Balancing Market Dynamics and Economic Pressures
While advocating for a freer rupee, the central bank remains cautious about India’s economic vulnerabilities. With nearly 90% of its oil imported, a weaker rupee exacerbates the country’s energy bill, a critical concern given rising global oil prices. The RBI is also monitoring speculative positions closely, prepared to intervene decisively if market conditions demand.
Foreign investor sentiment remains a key consideration. Recent portfolio outflows, including $2 billion from equities and $705.5 million from fixed-income securities in early January, underscore the need for a balanced exchange rate regime to retain investor confidence. Despite these challenges, the RBI expects some stabilization in the rupee’s value, with a potential strengthening anticipated after the upcoming political transition in the United States.
The policy adjustments initiated under Malhotra reflect a pragmatic approach, balancing the need for currency flexibility with India’s broader economic realities. As the governor prepares for his first monetary policy meeting in February, the evolving stance signals a pivotal shift in how the RBI navigates the complexities of global and domestic market forces.
