Using rupee as stabiliser can hurt real economy, says ex-Indian central bank official

The local currency threatened to breach 97 per dollar for the first time earlier this month, but has rebounded around 2% after the RBI allowed oil companies to access dollars from its reserves and imposed reserve requirements on large FX hedging transactions, curbing demand for the greenback. The Reserve Bank of India (RBI)'s interventions have drawn mixed views from economists. On Wednesday, the IMF said India should let the exchange rate move as the first line of defence.

"Since the advent of floating exchange rates, the experience has been quite the opposite of the exchange rate acting as an automatic stabiliser," former RBI Deputy Governor Michael Debabrata Patra told Reuters in an emailed interview. His comments were not directly in response to the IMF's call. Exchange rate behaviour has been characterised by overshoots, self-fulfilling expectations and band-wagon effects, Patra said.

Patra, who was deputy governor at the central bank and oversaw monetary policy from 2020 to 2025 -- a period in which the rupee traded in a range of 73-91 per dollar -- added that the rupee's volatility has been relatively contained and its movements should be viewed over time. The rupee’s one-year realised volatility stands at around 5%, broadly in line with Asian peers. The roughly 5% depreciation against the dollar it has registered so far this year places it in the middle of the pack.

Patra said policymakers could help cushion the impact of global disruptions on markets through effective communication. "What could possibly help in promoting orderly market activity and bolstering market confidence is perhaps timely and patient communication to shape expectations," he said. The RBI's monetary policy committee hiked its benchmark repo rate by 25 basis points at its most recent meeting and changed its stance to "calibrated tightening" from "neutral", while minutes of the meeting reflected some caution from policymakers over the pace of tightening to avoid inhibiting economic growth.