Moneycontrol Pro Panorama | Happy Holidays: Sponsored by the RBI

Protecting markets from the undue effect of external events is the cornerstone of any central banker’s job description and the RBI is no different.

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

Christmas cheer has certainly found its way into markets and the holiday season spending patterns. Those in India who don’t bring the Christmas tree at home are heading somewhere on holiday to see one. It is a time marked with travel and Indians are getting surprised by the fact that travelling within the country is far more expensive than perhaps heading to some overseas destinations. Our South-East Asian neighbours such as Vietnam -- even some African countries -- are wooing us with visa-free entries.

But did you know that you have the Reserve Bank of India (RBI) to thank for removing at least one worry off your list during foreign travel? That worry is the foreign exchange rate. Yes, banks overcharge for forex conversion and yes, there are cumbersome rules to be followed. But have a look at what the rupee to the dollar conversion rate is, chances are that it is close to what it was three months ago or even six months ago. You shelled out Rs 83 plus other charges to get your hands on the buck two months back, and the same price applies now, too.

Rewind to 2022 when the rupee had a volatile episode, swinging on average 2-3 rupees against the US dollar. Probably your pre-booked cheap foreign tour looked expensive by the time you actually left!

If you are an investor or a non-resident Indian, you appreciate a stable currency more than anyone in the world. The exchange rate does not eat into your returns or risk wiping off your capital. All thanks to the gatekeeper, RBI.

But the central bank has come under fire for its intense interventions in the foreign exchange market. Looking at its own data for October, we now know that the RBI bought $36.7 billion and sold $37 billion in a single month. That is 17 percent of the market volume, the highest since 2012 and the most intense under the current governor, as Reuters captured it in this piece. The International Monetary Fund now calls our forex regime “stabilised management” and not a “floating” exchange rate. Of course, the RBI has protested vehemently. This is not the first time it has been called out. The US treasury department classified the RBI as a currency manipulator back in 2021.

Should the RBI be vilified for its job? Are we a wannabe China with too tight a control on an instrument that should be determined by the market?  Our columnist Subir Roy has a take on the same. Do read.

Protecting markets from the undue effect of external events is the cornerstone of any central banker’s job description and the RBI is no different. The IMF’s contention is based on a short period where multiple external events threatened markets globally. The RBI has merely done its job of reducing the impact of these on India’s economy. Indeed, the rupee has closely mirrored the fundamentals of the economy because of the heavy interventions of the central bank.

Of course, there is an unhappy section of the market that bore the brunt of the interventions: forex traders. You cannot make money punting on something that is controlled! Traders believe that the RBI has gotten carried away in its bid to protect the market.

To be sure, the grip of the RBI on foreign exchange has increased over time. The central bank now even intervenes in the offshore non-deliverable forward which is not even in its jurisdiction. It influences the currency futures market and has been dialling up its interference here.

There are costs involved in intervening and too much of it can upset even monetary policy objectives. But the costs of volatility are much higher for a capital-starved country like India. A volatile exchange rate tends to shake investor confidence. History would be kind to the RBI on its foreign exchange policy. For now, let us be thankful that our holidays are free of exchange rate worries.

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Aparna IyerMoneycontrol Pro