MUMBAI: RBI has broken its silence on exchange rate movements, with governor Sanjay Malhotra saying the central bank will “ensure orderliness and stability without compromising market efficiency”.
Economists and forex dealers speculate that RBI’s stance may have shifted with the arrival of Malhotra, as the sharp fall in the rupee’s value coincided with his appointment. While the exchange rate reflects global uncertainty triggered by US President Donald Trump‘s tariff policies, the approach contrasts with that under previous RBI governor Shaktikanta Das, when the rupee stayed within a narrow band even as other currencies fluctuated significantly.
“Our interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band. The exchange rate of the rupee is determined by market forces,” said Malhotra. On Friday, after the rate cut announcement, the rupee closed at 87.42, gaining 16 paise from its previous close. Meanwhile, forex reserves rose by $1 billion to $630.6 billion in the week ended Jan 31.
Malhotra, during a press conference, said the exchange rate depends on demand and supply dynamics. “We should not focus on day-to-day volatility but rather on the long-term trend. This applies not just to the rupee but also to other asset classes like sensex, Nifty, and commodity prices. Daily movements may not always be significant.”
He said the rate cut decision and policy stance were taken considering the exchange rate, noting that a weaker rupee adds to inflationary pressure. “According to our studies, a 5% depreciation, on average, leads to a 35bps rise in imported inflation.”
Even if trade wars and tariff disputes do not escalate, the uncertainty itself affects growth, investment, and consumption decisions. “A significant part of the dollar’s appreciation and the rupee’s depreciation is linked to this uncertainty,” Malhotra said.