RBI should let rupiah follow fundamentals, only intervene to curb volatility :D Subbarao
The Reserve Bank of India (RBI) should let the rupee follow fundamentals, allow it to depreciate if necessary and only intervene in markets to curb volatility, former Governor D Subbarao said on Friday.
Speaking at a brainstorming session hosted by The Indian Express, Subbarao said the RBI is caught in a classic impossible trinity situation, which states that no central bank can at the same time have a open capital account, a fixed exchange rate and an independent currency. Politics. “So far, the RBI has defended the exchange rate. I wouldn’t say it was a very solid defense, but they tried to prevent a hard fall. Going forward, I think the RBI should allow the rupee to follow the fundamentals and if the fundamentals suggest the rupee should go down further, they should allow it to go down.
Subbarao said that although the rupee has depreciated against the dollar, it has appreciated against some currencies and the real effective exchange rate is still above 100. This suggests that there is some room for depreciation.
At the same time, the RBI should not completely drop its defense of the rupiah and intervene to ensure there is no volatility, Subbarao said. “In other words, they shouldn’t design the extent of the fall, but they should design the trajectory of the fall.”
Also Read: RBI will focus on protecting economic growth while fighting inflation, says Shaktikanta Das
Although the depreciation of the rupee has a cost, it also has the advantage of supporting exports. While a strong pile of foreign exchange reserves offers the central bank an opportunity to mount its defense against the rupiah, a sharp decline could lead to adverse market perceptions. “Markets also see the rate at which reserves are declining, not just the level of reserves. If the reserves are declining rapidly, there will be a negative perception of the decline. Ultimately, I believe that a failed exchange rate defense is worse than no defense,” Subbarao said.
Moreover, the RBI’s swift action whenever the rupee hits a psychological barrier could lead market participants to outsource their currency risk management to the central bank, he added.
Subbarao said that after the experience of the global financial crisis, central bankers have accepted that an undivided focus on price stability for a numerical inflation target is unwarranted and that they also need to look at the financial stability. “I was actually quite surprised that when we decided on our own inflation targeting framework, there was no leeway for exchange rate management as it was of an inflation targeting framework with sufficient concern for growth, but nothing for the exchange rate,” Subbarao said. While arguing for the importance given to the exchange rate in monetary policy, he observed that India should not stray away from an inflation targeting framework, being an emerging economy. “We can change our inflation targeting framework, but it’s just too early to give it up. In fact, if the RBI says it will abandon the inflation targeting framework, it can be very damaging,” he said.
The former governor said if India needed one thing to drive growth, it was investment. Investment will only pick up if consumption picks up both globally and in India. “So what we need to see is not just growth, but we need to make sure that the benefits of growth go to the lower segment of the population because their marginal propensity to consume is higher,” said Subbarao, adding that unemployment is the most important. problem for today’s economy.
As the RBI moves ahead with its plans to launch a central bank digital currency (CBDC), one of the motivating factors behind this could be an intentional pushback against the onslaught of private cryptocurrencies. However, CBDCs cannot replace private cryptocurrencies because they can only be a medium of exchange, while private cryptocurrencies are considered a medium of investment, Subbarao said.
Although CBDCs can allow exchanges to be settled bilaterally without using the Swift mechanism, the role of aggregators and dollar hegemony are both here to stay, Subbarao said. “In fact, the sanctions against Russia demonstrated the dollar’s continued stranglehold on the global economy, trade and finance. The introduction of CBDCs will, to some extent, facilitate bilateral trade and payments, but I do not believe it will remove multilateral payment systems or dollar hegemony.
Although Subbarao does not recommend a second wave of consolidation among public sector banks, he stressed the need for privatization. “There will never be a perfect time to do something like bank privatization. I think it’s something we should do because it’s so important,” he said.