RBI should limit intervention in forex market, says D Subbarao

D Subbarao

The Reserve Bank of India (RBI) should limit its intervention in the foreign exchange market and let the exchange rate respond to the market fundamentals, former Governor D Subbarao said in an exclusive interview with Moneycontrol on January 15.

“I believe that the RBI should veer more towards keeping away from the market than playing in the market,” Subbarao said. He was speaking to Moneycontrol on the sidelines of the 14th India Investment Conference, the CFA Society’s annual flagship conference in Mumbai. The theme for this year's India Investment Conference is ‘Shifts in Economic Influence: A New World Order’.

Subbarao said every time the exchange rate moves and the RBI tries to stabilise it, the message will go to the market that the RBI will take care of exchange rate fluctuation and players can play around with whatever.

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Last month the International Monetary Fund (IMF) in its Article IV consultations staff report said that India's interventions in the forex market "likely exceeded levels necessary to address disorderly market conditions and has contributed to the rupee-USD moving within a narrow range since December 2022".

However, the RBI officials were having none of it. The report noted that the Indian central bank "strongly disagreed" with the IMF's assessment and said the agency was picking data "selectively".

"In their (RBI) view, (IMF) staff's assessment is short term and restricted to the last six to eight months without any rationale for the same, and if a longer-term view of two to five years is taken, the IMF's assessment would fail. In the authorities' view, therefore, the IMF's reclassification of the de facto exchange rate regime to 'stabilised arrangement' is unjustified," the report said.

Adding to this, RBI officials, in their meetings with the IMF, said the interventions were in line with the "best principles of transparency" and that the rupee's exchange rate continues to be market determined.

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On the foreign exchange reserves front, Subbarao said holding reserves is a safety net, but also involves cost.

“So, we're incurring a cost in maintaining a very high level of reserves,” the former RBI governor said.

India’s foreign exchange reserves for the week ended January 5 stood at $617.3 billion. So far this fiscal, the reserves have increased by $55.72 billion, according to the RBI.

In October 2021, the forex kitty had reached an all-time high of $645 billion. The reserves took a hit as the central bank stepped in to defend the rupee amid pressures caused majorly by global developments since last year.

On December 29, Moneycontrol reported that the Indian rupee is likely to trade in the broader range of 82 and 85 against the US dollar in the year 2024 on account of visible upside risks and despite expected inflows from foreign investors, experts said.

They said foreign fund inflows are expected after the inclusion of government securities in the global bond index. At the same time, it is critical to watch what direction the interest rate trajectory will take considering the inflation numbers, other geopolitical tensions, and rising Covid-19 cases in India, experts added.

The Indian rupee depreciated around 0.7 percent in 2023, due to rate hikes by the global central bank and a higher dollar index. Currently, the Indian rupee is trading at 82.84 against the US dollar.