Reserve Bank of India (RBI) Governor Sanjay Malhotra is showing a willingness to allow the Indian rupee to fluctuate more freely. This comes as he emphasizes the importance of monitoring the currency’s movements while still stepping in to manage excessive volatility.
Malhotra, who assumed office in December, has been engaging with various departments within the RBI. Ahead of his first monetary policy meeting in February, he has expressed interest in understanding the RBI’s currency intervention strategies. According to sources, he did not oppose discussions around the rupee’s recent declines and acknowledged the necessity for its depreciation.
The RBI aims to avoid anchoring the rupee to a specific value. Instead, it plans to intervene periodically to reduce volatility and prevent speculative attacks. Malhotra’s approach indicates a potential departure from former Governor Shaktikanta Das, who maintained strict control over the currency. Under Das, the rupee’s volatility hit record lows among emerging markets, while the RBI amassed over $700 billion in foreign exchange reserves to support the currency.
Following Malhotra’s signals, the rupee experienced a sharp decline, hitting a record low of 86.7025 per dollar. It later recovered slightly, trading at 86.5875 per dollar in Mumbai. Since Das’s exit, the rupee has fallen 2% against the dollar, with implied volatility reaching its highest levels in over a year. The currency’s significant drop was influenced by a strong US dollar and rising oil prices due to sanctions on Russian energy.
Despite being one of the better-performing currencies in Asia last year, the rupee has faced pressures. The RBI’s strict policies led to an overvaluation of the rupee, with the trade-weighted gauge soaring to an all-time high of 108.14 in November. This overvaluation has raised concerns among exporters, who argue that a stable rupee puts them at a disadvantage compared to competitors.
Recent data shows that foreign investors have withdrawn around $2 billion from Indian shares this year. These outflows highlight that a stable exchange rate is not enough to guarantee investor confidence.
While the RBI is prepared to allow the rupee to depreciate, it remains cautious about India’s growing import costs, particularly in energy. The country relies heavily on oil imports, and a weaker rupee could further inflate these expenses.
Malhotra’s administration is closely watching open positions in the currency market. The RBI is ready to intervene quickly to counter any speculative trends. With the upcoming inauguration of Donald Trump as US president, there are expectations for some stabilization in the exchange rate in the lead-up to the February monetary policy meeting.
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