The Reserve Bank of India (RBI) has said that recent claims by some experts, suggesting that the central bank’s exchange rate policy stance has significantly impacted India’s export competitiveness, are not supported by evidence.
“The inference by some commentators that the exchange rate policy stance has significantly impacted India’s export competitiveness is not substantiated by evidence,” RBI said in its State of the Economy report.
The RBI emphasised that the level of the Indian rupee (INR) is ultimately determined by market forces of demand and supply, which, in turn, reflect the underlying macroeconomic fundamentals of the Indian economy. And, interventions in the forex market smooth undue volatility so that the market clears in an orderly manner.
RBI has highlighted that interventions in the forex market is important at a time when global economic uncertainty is unprecedentedly high amidst persisting geopolitical tensions, divergent monetary policy pathways, geoeconomic fragmentation, and political spillovers, among other overlapping crises.
“By imparting stability to the INR, the economy remains relatively insulated from multiple global spillovers and attendant financial stability risks,” RBI said in its report.
Independent commentators have argued that RBI, since liberalisation in 1991, has followed a flexible exchange rate policy wherein it never allowed the rupee to float completely freely but did allow it to move as needed. However, since 2019 while RBI bought reserves during episodes of capital inflows, it also sold reserves aggressively during periods of downward pressure to limit the depreciation of rupee.
RBI has argued that it undertakes two-sided forex interventions (FXI) to contain excessive volatility and maintain orderly conditions in the foreign exchange market, without targeting any specific level of the exchange rate.