RBI Governer clarifies Indian Rupee is free-floating currency

RBI MPC Meet: In his announcement at the Monetary Policy Committee meet, RBI Governor Shaktikanta Das said that the Indian Rupee is a freely floatable currency, and the market determines its exchange rate. 

"The rupee is a freely floatable currency, and the market determines its exchange rate; the RBI has no set exchange rate in mind. The Governor further noted that the banks' overriding objective is to ensure macro-economic stability and market confidence when announcing the MPC announcements. "The RBI intervenes to reduce undue volatility and anchoring expectations," Das remarked while announcing the MPC announcements.

The Indian rupee declined by 7.4%, while the US Dollar increased by 14.5% up to September 28 versus a basket of major currencies, Das said. He also noted that the fluctuation of the rupee  has been more orderly than that of its Asian and emerging market economies (EME) peers.

Further explaining how the unchecked rise in the US dollar affected Indian foreign exchange reserves, Das said, "We remain confident of meeting our external financing requirements comfortably. About 67% of the decline in reserves during the current financial year is due to valuation changes arising from an appreciating US Dollar and higher bond yields."

In addition, the RBI Governor noted that India's other external indicators, including its external debt to GDP ratio, net international investment position to GDP ratio, ratio of short-term debt to reserves, and debt service ratio,  indicate lower vulnerability when compared to most major EMEs. In fact, India's external debt to GDP ratio is the lowest among major EMEs.

The return of capital inflows since July is evidence of how effective our actions have been in restoring investor confidence, and over the medium term, the primacy of price stability embedded in our flexible inflation targeting (FIT) frame will continue to be a priority, the RBI's governor said. 

In discussing the steps the RBI can take in the coming days, he noted that the central banks' actions will be guided by "incoming data and evolving scenario" and not factor in conventional or textbook approach to policy making.

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