Q Are you satisfied with India’s currency management?
“We are a marketdriven economy. The RBI has a limited role to intervene to manage excess volatility”
— DR AJAY SAHAI
DG and CEO, Federation of Indian Exporters Organisation
l N.R. BHANUMURTHY: The RBI appears to be actively intervening in the forex market, especially to maintain stability while not targeting the level of the exchange rate. Added to that, some of the recent measures to attract foreign capital should also help in currency management. RBI permitting trade invoices in rupee should cushion the dollar demand to some extent. But most importantly, this time around there is perfect coordination between India’s fiscal and monetary authorities and this augurs well for overall Balance of Payment management.
l ADITI NAYAR: The INR has displayed less volatility than many EM (emerging market) currencies. Forex sales by the central bank, a host of timely measures to support the currency, and a period of relatively lower crude oil prices have contained the extent of the INR weakness over the last few weeks. The RBI has recently introduced several measures to support the INR, such as relaxations for NRI deposits, external commercial borrowings and short-term investments in FPI-debt securities, which should modestly boost inflows. Additionally, measures towards international trade settlement in INR should hasten the internationalisation of the INR over the medium term.
l DHARMAKIRTI JOSHI: It has been quite pragmatic with an array of tools being used. The experience of past currency crises shows that forex reserves, even if sufficient, can quickly burn in case of a run. Hence, alternative channels are required. The RBI has resorted to intervention in the spot and forward markets as the first line of defence. It has also announced measures on the capital account to woo forex, such as exempting foreign currency deposits from statutory reserve requirements, and easing provisions on remittances. The government, on its part, has hiked import duty on gold to discourage imports (similar to when the taper tantrum occurred) and introduced gold bonds as an alternative to physical gold investment. But high import duty can encourage smuggling and should be transitory.
l AJAY SAHAI: We are a market-driven economy. The RBI has a limited role to intervene to manage excess volatility. If it intervenes more, it will increase the money supply, which could be inflationary. RBI’s objective has been to intervene when it breaches a milestone. ■