The Reserve Bank of India (RBI) should avoid excessive intervention in the foreign exchange market and allow businesses to adapt to currency volatility, according to former RBI Governor Duvvuri Subbarao. Subbarao, who led the central bank during the 2008 global financial crisis, argues that continuous intervention creates a moral hazard, encouraging market participants to rely on the RBI for risk management instead of developing their own strategies.
Recent reports suggest a potential shift in the RBI’s currency management approach under new Governor Sanjay Malhotra, with the rupee potentially allowed to fluctuate more freely. This follows criticism from the International Monetary Fund in late 2023, which suggested India’s interventions were inconsistent with a floating exchange rate regime. The US administration under Donald Trump also raised concerns about India’s currency practices.
Subbarao emphasizes that as India’s economy integrates further with the global market, companies need to learn to navigate currency fluctuations independently. He argues that excessive intervention by the RBI can create unfair advantages, benefiting importers at the expense of exporters. “If the RBI intervenes to prevent a depreciation of the rupee,” Subbarao explains, “it’s benefiting importers at the cost of exporters. The RBI needs to take into consideration the fairness of doing that.”
The rupee has experienced a decline of approximately 3% in the last three months, reaching a record low of 86.7025 per dollar on Tuesday before recovering slightly on Wednesday. This depreciation might indicate a change in the RBI’s strategy, contrasting with the tight control maintained under former Governor Shaktikanta Das.
Subbarao’s tenure as RBI Governor, from 2008 to 2013, coincided with a period of significant rupee depreciation, including the “taper tantrum” episode. This period saw the rupee fall against the dollar while most other Asian currencies appreciated.
Subbarao warns that excessive intervention can impose a burden on the entire economy to benefit a small group of market participants, creating a “costly moral hazard.” He advocates for a more hands-off approach, allowing the market to determine the exchange rate and fostering resilience among Indian businesses. This approach, he believes, will better equip India to navigate the complexities of the global economy.
