Should RBI shift gear on its managed float of the Indian rupee?
Subscribe to enjoy similar stories. The Indian rupee has been under pressure in recent months, with more of it being converted into US dollars than the other way round. Last week, its exchange rate slipped below ₹85 to the dollar.
The truly remarkable bit, however, is how gentle the slide has been, given the recent outflows from share sell-offs by foreign investors, strong dollar demand from importers and the greenback’s global gains in anticipation of Donald Trump’s policies. Attribute this to how actively the Reserve Bank of India (RBI) has been managing the rupee’s ‘managed float.’ Since RBI intervention in the forex market has winners and losers both, a debate has arisen over it. A sharp drawdown of its forex reserves is a tell-tale sign of heavy dollar sales to support the rupee’s value.
Left alone, it would have fallen more. Critics of this tactic argue that the pursuit of short-term rupee stability has kept it overvalued, broadly, making our exports dearer overseas than stuff from rival countries that let their currencies slide freely. Last week, Abhishek Anand, Josh Felman and Arvind Subramanian offered data to show that RBI has not just offloaded dollars, but also been using forward contracts to prop the rupee.
While this add-on device interferes less with monetary policy, most forex trading does. Indeed, multiple aims in the face of a macro trilemma make RBI’s job harder and more thankless. Should it not let the rupee float more freely to focus on its inflation mandate? The trilemma is this: An economy open to capital flows that pegs its currency to another does so at the cost of its tools for inflation control and growth propulsion going blunt.
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