The Reserve Bank of India has signalled a subtle but significant shift in its approach to rupee management, reducing the frequency and scale of its daily foreign exchange market interventions. The central bank's new approach allows wider day-to-day fluctuations in the USD/INR exchange rate while retaining the capacity to intervene during episodes of excessive volatility or disorderly market conditions.
RBI Governor Sanjay Malhotra, in a speech at a FICCI banking conclave, indicated that the central bank is comfortable with exchange rate flexibility as long as movements reflect fundamentals rather than speculation. He noted that India's strong macroeconomic position — reflected in record forex reserves, a narrowing current account deficit and robust capital flows — provides a solid foundation for greater exchange rate flexibility without risking currency instability.
The shift toward a more market-determined exchange rate is in line with recommendations from the IMF and World Bank, which have long advocated greater exchange rate flexibility for India as the economy grows and integrates more deeply with global financial markets. Exporters' associations have expressed concern that greater volatility could complicate hedging strategies, while importers and FIIs broadly welcome the move toward a more transparent and market-aligned currency framework.
