IMF urges currency flexibility as RBI steps up rupee defence amid oil price pressures, foreign outflows

With economies facing a succession of global shocks, exchange rates should be allowed to absorb some of the pressure and act as the “first line of defense,” he said, without naming the Reserve Bank of India.Central banks grappling with currency weaknessCentral banks across Asia are grappling with currency weakness as global shocks drive capital outflows and boost demand for dollars. Policymakers from Indonesia to Japan have deployed a mix of interest-rate increases and market intervention, testing how far authorities can resist depreciation without running down reserves or imposing greater costs on their economies.In India, the RBI is mounting its most forceful defense of the rupee since the 2013 taper tantrum.

The currency has been among Asia’s worst performers this year, pressured by elevated oil prices and persistent foreign outflows from Indian stocks.The RBI this month rolled out a special window to meet dollar demand from state-run oil companies and a new tool requiring banks to park cash against certain foreign-exchange transactions. The moves followed its first interest-rate increase in nearly four years, as policymakers confront the risk that a weaker rupee and elevated crude could further stoke inflation.What RBI is doing to cushion pressure on rupeeThe IMF drew a distinction, however, between intervening in the currency market and measures designed to attract capital.

Ranil Salgado, its senior resident representative for India, Bhutan and Maldives, described recent RBI steps to ease foreign inflows as broadly positive. “We think that is a good policy,” he said.The central bank has sought to bolster dollar supplies by easing rules for foreign borrowing and offering incentives to attract foreign-currency deposits from overseas Indians. Those measures have brought in billions of dollars, helping cushion pressure on the rupee without relying solely on the RBI’s reserves.Salgado also noted that the RBI’s stated policy is to curb excessive currency volatility rather than defend a particular exchange-rate level.