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India’s central bank responded to the criticism of its tight grip on the rupee this year, laying out its justification for closely managing the currency.
The nation is trying to insulate its economy from global spillovers and financial stability risks by keeping the currency stable, the Reserve Bank of India said in its monthly bulletin, as the rupee is one of the least volatile currencies in the world.
The comments try to address concerns that the RBI has artificially kept the exchange rate stable through excessive interventions in the foreign exchange market. The RBI has used its nearly $700 billion forex pile to prevent wild swings in the rupee.
The level of the rupee is determined by demand and supply in the market, which is reflective of the macro fundamentals of the economy, RBI officials including Deputy Governor Michael Patra wrote in their latest bulletin Wednesday.
“Forex market interventions need to be adjusted for the economy’s size to draw a fair conclusion,” the officials wrote. The monetary authority’s net interventions to the gross domestic product averaged 1.6% from February to October 2022, against 1.5% during earlier crises, which were of much lower magnitude, they added.
The RBI reiterated the point made by Governor Shaktikanta Das several times that India’s reserves are built after meeting all current and capital financing needs to act as an umbrella for rainy days.
The central bank’s exchange rate policy has not hurt India’s trade competitiveness and the country’s export emphasis is shifting toward improvements in quality and technology without needing “artificial props such as from an undervalued exchange rate,” they said.
The Indian rupee has declined 1.5% this year against the dollar. It weakened to a new low Thursday on likely foreign outflows from local stocks and risk aversion spurred by escalating tensions between Russia and Ukraine.
On the currency’s medium-term outlook, the RBI “remains bullish as global turbulence subsides and the innate strength of the macro-fundamentals reasserts itself.”
(Updates with the latest rupee move in eighth paragraph.)
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