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The Reserve Bank of India (RBI) will intervene in the foreign exchange market to check any sharp fall and volatility in the rupee, according to Subir Gokarn, Deputy Governor, RBI.
“Of late, capital flows seem to be moving the exchange rates and account for much of the volatility. The domestic forex market has witnessed a prolonged period of volatility with a one-way depreciation bias,” Gokarn said at an RBI and Asian Development Bank conference on managing capital flows.
Policy responses
In India, Gokarn said, the prudent policy responses to volatility in capital flows and exchange rate volatility can be broadly classified into administrative measures, market-based measures and direct intervention in forex markets.
“Any steep currency fall has a tendency to fuel expectations of further depreciation,” Gokarn said.
“Therefore, the intervention policy not only aims at quelling the excessive volatility, but also attempts to moderate speculative one-way downward movement of the India rupee,” he added.
He observed that across emerging market economies, those with current account deficit (CAD) were characterised by relatively higher currency volatility. He also said that flexibility and pragmatism are needed in exchange rate policy management in developing countries, rather than adherence to strict theoretical rules.
Large capital flows and considerations of maintaining a competitive exchange rate, on the one hand, and controlling inflation, on the other, create conflicting objectives for a central bank. In such a situation, central banks need to take a cautious path while handling large capital flows.
Falling rupee
The rupee has fallen nearly 3 per cent against the US dollar over the past one month as global risk aversion has increased due to concerns over the approaching US fiscal cliff.
As compared with an appreciation of 1.1 per cent during 2010-11, the Indian unit fell by more than 12 per cent during 2011-12.
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