NEW YORK: The Reserve Bank of India will go on with the usage of currency intervention so as to reduce volatility in the country’s exchange rates, says the banks governor, Raghuram Rajan.
“There is a school of thought that says: Let the exchange rate move wherever it will,” said Rajan, at the Inaugural Kotak Family Distinguished Lecture held at Columbia Law School in New York.
He added that “That’s something we could do, but in emerging markets, with institutions not as strong as industrialized countries, you find there are collateral effects of both the capital moving in and going out.”
He said that India will intervene in the currency market under a situation where there is sustainable risk in global markets and flood capital comes into the country.
“We really don’t want the currency to move only as result of capital flows,” Mr. Rajan said. “We would like it to be more focused on the underlying fundamentals of trade and services.”
The foreign exchange reserves in India swelled as high as $360 billion for the week ended April 1st.
Mr. Rajan confirmed that the reserve build-up in India was due to the fact that the the central bank intervened.
“So we let the exchange rate move, we never stand in the way, but we pick up some as flows come in,” he added.
The monsoon in India for the two years that have passed has been poor and this has caused drought. It is expected that the La Nina phenomenon later on this year will lead to a better monsoon.
If a third consecutive drought will imply that food prices will hike, while the purchasing power will go down leading to a slow economic recovery.
Source: Reuters 2016