RBI Defends FX Policy As India’s Attempt To Avert Global Risks

India is trying to keep its currency stable to ensure the economy is insulated from global spillovers and financial stability risks, according to the nation’s central bank.

The level of the rupee is determined by demand and supply in the market, which is reflective of the macro fundamentals of the economy, Reserve Bank of India officials including Deputy Governor Michael Patra wrote in their monthly bulletin Wednesday.

The comments try to address criticism that the RBI has artificially kept the exchange rate stable through excessive interventions in the foreign exchange market. The RBI has used its nearly $700 billion forex pile to prevent wild swings in the rupee, making it one of the least volatile currencies in the world.

“Forex market interventions need to be adjusted for the economy’s size to draw a fair conclusion,” RBI officials wrote. The monetary authority’s net interventions to the gross domestic product averaged 1.6% from February to October 2022, against 1.5% during earlier crises, which were of much lower magnitude, they added.

The RBI reiterated the point made by Governor Shaktikanta Das several times that India’s reserves are built after meeting all current and capital financing needs to act as an umbrella for rainy days.

The central bank’s exchange rate policy has not hurt India’s trade competitiveness and the country’s export emphasis is shifting toward improvements in quality and technology without needing “artificial props such as from an undervalued exchange rate,” they said.

The Indian rupee has declined 1.5% this year against the dollar, the least among Asian currencies.

On the currency’s medium-term outlook, the RBI “remains bullish as global turbulence subsides and the innate strength of the macro-fundamentals reasserts itself.”