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India’s central bank must avoid excessive intervention in the foreign exchange market and allow companies to adjust to volatility, according to a former central bank chief.
“If the Reserve Bank of India intervenes to stabilize the exchange rate against fundamentals, market participants will outsource their risk management to the RBI,” Duvvuri Subbarao, head of RBI during the global financial crisis said in an interview last week.
The RBI has relied on aggressive FX interventions to squeeze rupee volatility in recent years. That led to the International Monetary Fund to say in late 2023 that India’s currency management had gone so far as to no longer make it a floating exchange rate. It also drew criticism from the US administration during Donald Trump’s first term.
“As India expands and integrates more into the world, our market participants need to be able to adjust to the swings without being backstopped by the RBI,” Subbarao said.
He spoke before Bloomberg News on Tuesday reported the rupee may be permitted to move more freely under new Governor Sanjay Malhotra.
The currency is down about 3% in the past three months, indicating a possible change in the RBI’s currency management approach. Under the previous head Shaktikanta Das, the central bank focused on keeping a tight grip on the rupee.
“For example, if the RBI intervenes to prevent a deprecation of the rupee, it’s benefiting importers at the cost of exporters,” Subbarao said. “The RBI needs to take into consideration the fairness of doing that.”
The rupee tested a series of new lows recently, slipping to an all-time low of 86.7025 per dollar on Tuesday. It rose 0.3% on Wednesday.
The currency plummeted against the dollar during Subbarao’s five-year tenure, which ended in September 2013 and included the taper tantrum. That slump stood in contrast to the performance of most other Asian currencies, which rose during the period.
Excessive intervention, may impose “a burden on the whole economy,” for the narrow benefit of a few market participants, said Subbarao. “That will be a costly moral hazard.”
