India’s new central bank governor, Sanjay Malhotra, appears ready to let the rupee move more freely against regional peers while still intervening to curb sharp volatility, according to a Bloomberg report citing individuals familiar with the matter.Â
Malhotra, who took office in December, has been closely reviewing the Reserve Bank of India’s (RBI) currency intervention strategies ahead of his first monetary policy meeting in February.
Under his leadership, the RBI may allow greater flexibility in daily currency fluctuations, breaking from the tighter controls maintained by his predecessor, Shaktikanta Das. During Das’s six-year tenure, the rupee’s volatility was among the lowest in emerging markets, and the RBI amassed over $700 billion in foreign exchange reserves to defend the currency.
The rupee recently fell to a record low of 86.7025 against the dollar before recovering slightly. This decline comes as foreign outflows intensify, with investors pulling $2 billion from equities and $705.5 million from fixed-income securities this year. Rising oil prices and a stronger dollar have also pressured the currency.
The shift in policy is partly in response to exporter complaints about the rupee’s stability hurting trade competitiveness. Exporters argued that rival nations allowed their currencies to depreciate, boosting their trade advantages. The rupee’s real effective exchange rate reached 108.14 in November, an 8% overvaluation, prompting calls for a more flexible approach.
Despite allowing greater depreciation, the RBI remains cautious about India’s import bill, which is heavily influenced by oil costs as the nation imports 90% of its crude. The central bank plans to monitor speculative positions closely and intervene decisively if needed to prevent excessive swings.