Last week, the rupee weakened against the dollar past the 81-mark to a record low. In recent months, the Reserve Bank of India (RBI) has been intervening in the forex market to smoothen the decline. With the RBI dipping into its kitty for this purpose, Indian foreign exchange reserves have fallen by about $94 billion in 12 months to about $545 billion until mid-September. How much more forex can the RBI afford to use in reducing currency volatility? Does the benchmark interest rate, as a policy tool, have a role to play? Dharmakirti Joshi and Lekha Chakraborty discuss these questions in a conversation moderated by K. Bharat Kumar. Edited excerpts:
What is your view on the RBI’s actions to stem the rupee’s decline? How much of its forex reserves should it use for this?
Dharmakirti Joshi: The use of forex reserves is appropriate at this juncture. You build your reserves during good times and spend them during bad times. Right now, reserves are being spent in trying to curb currency volatility. You can’t defend the rupee at a particular level, because that would be swimming against the tide, which is not possible in this environment. But you can make it less volatile. Having said that, there is also a limit to how much you can lean on the reserves. They can burn out pretty quickly if you are aggressive in your interventions. So, you need a multi-pronged approach, which involves several measures, which the RBI has already taken to increase the supply of U.S. dollars in the Indian market, such as easing provisions for remittances, allowing short-term foreign portfolio investments in government securities, etc. We can even think of a scheme similar to the one introduced in 2014 to attract NRI investments.
