No evidence of exchange rate policy hurting exports: RBI report

The Reserve Bank of India (RBI) has said that recent claims by some experts, suggesting that the central bank’s exchange rate policy stance has significantly impacted India’s export competitiveness, are not supported by evidence.

 

“The inference by some commentators that the exchange rate policy stance has significantly impacted India’s export competitiveness is not substantiated by evidence,” RBI said in its State of the Economy report.

 

The RBI emphasised that the level of the Indian rupee (INR) is ultimately determined by market forces of demand and supply, which, in turn, reflect the underlying macroeconomic fundamentals of the Indian economy. And, interventions in the forex market smooth undue volatility so that the market clears in an orderly manner.

 

 

RBI has highlighted that interventions in the forex market is important at a time when global economic uncertainty is unprecedentedly high amidst persisting geopolitical tensions, divergent monetary policy pathways, geoeconomic fragmentation, and political spillovers, among other overlapping crises.

 

“By imparting stability to the INR, the economy remains relatively insulated from multiple global spillovers and attendant financial stability risks,” RBI said in its report.

 

Independent commentators have argued that RBI, since liberalisation in 1991, has followed a flexible exchange rate policy wherein it never allowed the rupee to float completely freely but did allow it to move as needed. However, since 2019 while RBI bought reserves during episodes of capital inflows, it also sold reserves aggressively during periods of downward pressure to limit the depreciation of rupee.

 

RBI has argued that it undertakes two-sided forex interventions (FXI) to contain excessive volatility and maintain orderly conditions in the foreign exchange market, without targeting any specific level of the exchange rate.

 

“This policy objective has remained unchanged since 1993. This approach has resulted in smoothening the effects of volatile capital flows, maintaining financial stability, and minimising spillovers to the real sector,” RBI said.

 

Further, it has argued that its interventions are intended to ensure that the market is liquid and deep, and functioning in an orderly manner. As a result, volatility of the INR has been steadily declining, which has had beneficial effects in terms of anchoring financial stability.

 

Rupee depreciated by 7.8 per cent during FY23 and by 1.4 per cent in FY24. And so far in FY25, it has depreciated by 1.5 per cent.

 

Additionally, the central bank has stated that between FY19 and FY24, while world merchandise exports recorded a compound annual average growth rate (CAGR) of 4 per cent, India’s merchandise exports posted a higher CAGR of 5.8 per cent.

 

According to RBI, the emphasis in India’s export effort is shifting towards expanding market share on the basis of improvements in quality and cutting edge technology without the need for artificial props such as from an undervalued exchange rate.

 

“India’s foreign exchange reserves are built after meeting all current and capital financing needs to act as an umbrella for rainy days. Thus, the forex reserves are used to shore up investors’ confidence, ensure that the forex market remains liquid and deep, especially when there are large capital outflows, and to mitigate financial stability risks all of which can have real sector implications,” RBI added.