Amid efforts being made to stem rupee's fall, RBI Governor D Subbarao has said the currency's exchange rate will largely be market-determined but central bank would intervene to prevent disruptions to macro-economic stability.
"We let our exchange rate be largely market-determined, but intervene in the market to smooth excess volatility and/or to prevent disruptions to macroeconomic stability," he said while speaking at the European Economics and Financial Centre here yesterday.
India, Subbarao said, has been following the 'middle solution' to deal with the exchange rate problems. Middle solution implies giving up on some flexibility to maximise overall macro economic advantage.
He elaborated that in India rupee is only partly convertible. While foreigners enjoy unfettered access to equity markets, access to debt market is limited. Also there are limits on funds which resident corporates and individuals can take out for investment abroad.
The RBI earlier this week had announced a slew of measures like raising cost of borrowing by banks by 2 per cent to 10.25 per cent and announcing sale of bonds worth Rs 12,000 crore through open market operations to suck liquidity in its bid to check sliding rupee which hit a life time low of 61.21 to a dollar.
Referring to fiscal deficit, Subbarao said it is by far the biggest concern from the central bank's perspective as it adds to aggregate demand and add to inflationary pressure.
"Credible fiscal consolidation is, therefore, a necessary precondition for stabilising inflation and securing non-inflationary growth," he said.
Subbarao stressed "economies will be best served if governments ensure that their central banks are able to conduct monetary policy independently and free of fiscal compulsions".
The government restricted the fiscal deficit to 4.9 per cent of GDP in 2012-13 and plans to bring it down to 4.8 per cent in the current year.
