India's forex market has required depth and liquidity to face volatility: RBI Governor Sanjay Malhotra

RBI Governor Sanjay Malhotra

Reserve Bank of India's new governor Sanjay Malhotra believes stability of prices is important as inflation continues to erode the value of money. In an opinion piece co-authored with K Balasubramanian in Times of India, Malhotra said that while inflation hurts people, especially the poor, not all inflation is bad.

Speaking on RBI's 90th anniversary, Malhotra and Balasubramanian noted, "Experts believe that a moderate level of inflation is healthy for economic growth. If inflation is too low, the economy faces stagnation risks. If it is too high, prices become unpredictable, making it difficult for consumers and businesses to plan and invest. We have chosen a target of 4% with a band of 2% for CPI inflation.”

They said that RBI's theme for its 90th anniversary was ‘Stability, Trust and Growth’, which embodies what the central bank stands for. "A strong and resilient financial system is the bedrock on which the edifice of economic prosperity of a nation is built. Reserve Bank of India is the custodian of our financial system," they added.

Also read: Next decade crucial for RBI in shaping country's financial architecture, says governor Malhotra

Speaking about the CPI inflation, the RBI Governor noted that it has mostly stayed aligned with the target. He further said that a flexible inflation targeting norm is due for review.

The two executives said India also has financial stability which complements price stability. They added that financial institutions have performed well, with banks and non-banking financial institutions (NBFCs) emerging stronger and well capitalized to carry out financial intermediation.

Speaking about the volatility seen in rupee’s strength in recent months, the RBI Governor noted that India's forex market has the required depth and liquidity to face such pressures. He noted that stable foreign exchange rates are important not only for exporters and investors, but also for general public. Indian rupee had fallen to record lows against the US dollar in February. It however strongly rebounded later, but continues to see significant volatility.

"The public relies on trust when they deposit their hard-earned money in banks. Monetary policy requires trust to keep inflation expectations anchored. Trust is important for financial stability. It is integral to the integrity of financial markets and payments and settlement systems. We’ll continue to strengthen the trust the public has reposed in us," Malhotra and Balasubramanian added in their opinion piece.

Malhotra noted that independence is imperative for the bank to generate trust. He added that the central bank strives to improve transparency, enhance consultation, coordination and collaboration and raise accountability through various measures.