This refers to Abheek Barua's article "Raghuram Rajan's arithmetic" (April 25). The contention of the central bank that it has no view on exchange rates and fair value for the rupee sounds like an enigma. How then does it determine the timing, direction (buy or sell) and volume of intervention in the forex market, be it for the professed purpose of smoothening the volatility spikes? The central bank is also silent as to the volatility index/metric it might be tracking for the purpose. We find that the Reserve Bank of India (RBI) has been intervening through the spot, forward and swap forex market. While taking positions in forward/swap deals for intervention or sterilisation purpose, the RBI is implicitly taking a view on the future value of the currency.
While it is not necessary for the central bank to fully disclose the policies, strategies, tools and weapons in its armour, through an appropriate communication strategy and signals, it can enable the economic agents to anchor exchange rate expectation, so that it dampens to some extent, the volatility amplitude of the exchange rates vis-à-vis the major trade currencies. This would perhaps make the RBI's job of exchange rate management more orderly and less onerous in the emerging era of fuller capital account convertibility.
Biplab Chakraborty, Kolkata
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