Market sets exchange rate, RBI acts to curb undue volatility: Governor Das

Important to note that the exchange is a barometer of the economy's strength, Governor Shaktikanta Das says

With the Indian rupee under pressure due to global developments and hitting a new low, prompting intervention by the central bank in the foreign exchange (forex) market, Reserve Bank of India (RBI) Governor Shaktikanta Das said that the exchange rate is market-determined and that the RBI does not target any specific level.

 

Speaking at an event organised by private broadcaster CNBC-TV18, Das said, “Our exchange rate policy is well-articulated and has remained consistent over the years. India’s exchange rate regime is market-determined, and the Reserve Bank does not target any particular level or band for the exchange rate.”

 

“The RBI intervenes in the forex market to ensure the orderly movement of the exchange rate, curb undue volatility, anchor market expectations, and ensure overall financial stability,” he added.

 

 

The rupee, which remained relatively stable over the past year and a half, came under pressure following the US Federal Reserve’s (Fed’s) rate cuts in September and the election of Donald Trump as US president. The rupee is currently trading at 84.4 to the dollar, marking an all-time low.

 

“It is important to note that the exchange rate is a barometer of the economy’s strength,” Das said.

 

He also reminded that India holds the fourth-largest forex reserve in the world, with $682 billion as of November 1, 2024. This reserve is sufficient to cover the entire external debt and 12 months of mercantile imports.

 

Das pointed out that India’s external sector has shown strength and stability in recent times. “The current account deficit has remained within manageable limits, standing at 1.1 per cent of gross domestic product in the first quarter of 2024-25.”

 

He added that the relative stability of the rupee, despite challenging conditions, reflects the country’s strong macroeconomic fundamentals.

 

“If the Indian rupee has remained relatively stable despite external shocks, including the largest and steepest tightening by the Fed in 2022 and 2023, it speaks volumes about the sea change in our macro fundamentals since the days of the taper tantrum,” Das asserted.

 

Commenting on India’s economic growth, Das said that it remains resilient. He noted that inflation is expected to moderate despite periodic fluctuations, and the external sector remains robust.

 

“…The Indian economy has navigated through a prolonged period of turbulence and continues to exhibit resilience in the face of emerging challenges,” he said.

 

Das refrained from commenting specifically on the October inflation numbers, which exceeded the central bank’s target of 6 per cent. The six-member monetary policy committee of the RBI shifted its policy stance to neutral in the October policy meeting, after maintaining a stance of withdrawal of accommodation for more than two years.

 

“The change in stance provides greater flexibility and optionality to act in sync with evolving conditions and outlook,” Das said.

 

Regarding the financial system, Das acknowledged that new challenges will continue to emerge.

 

“There is an ongoing need for financial sector entities to strengthen their capital levels and quality, while further enhancing risk management standards,” he added.

 

In this context, the governor mentioned that the RBI is working on issuing guidelines related to expected credit loss (ECL), liquidity coverage ratio, and a prudential framework for financing project loans.

 

“For instance, regarding the ECL framework, after issuing a discussion paper and reviewing stakeholder comments with an external working group, we now plan to issue a draft circular for the implementation of ECL. The goal is to gather further stakeholder feedback on specific aspects of the framework, given its significance for the banking sector.” He also indicated that the final guidelines for the disclosure framework on climate-related financial risks would be issued soon.

 

Das reiterated that the RBI endeavours to maintain a balance between banking sector stability and economic growth, both of which are essential and complementary.

 

He said while India’s financial sector is robust and resilient, there is no room for complacency. “Both regulators and regulated entities must remain alert and prepared for emerging challenges,” he added.