MUMBAI: Speaking on the rupee for the first time since it came under pressure this year, RBI governor
Urjit Patel said on Friday that the exchange rate was determined by demand and supply and that it was not bound by a ringed fence or fixed target.
The governor, who surprised markets by keeping key rates on hold, said the mandate of the central bank’s monetary policy was to target inflation while its forex operation only sought to eliminate volatility.
The rupee closed 19 paise lower to close at a fresh lifetime low of 73.77 against the dollar on Friday after breaching the 74 level for the first time ever in intra-day trade on the back of high crude oil prices.
Patel said part of the policy response to global developments was to allow the flexible exchange rate adjustment to correct the current account balance given the revised terms of global trade.
Patel’s statement indicates that rather than defending the rupee, the central bank sees a costlier dollar lowering imports and pushing up exports, thereby bringing stability. Exchange rate adjustment is an important part of how your economy adjusts to trade shocks,” said RBI deputy governor Viral Acharya, supporting this view.
Patel also played down the decline in the value of the rupee vis-à-vis the dollar. “The depreciation of the rupee has been moderate compared to other emerging market peers. On September 9 the rupee had depreciated in nominal effective terms by 5.6% since March 2018 and in real effective exchange rate (REER) terms the depreciation has been 5%,” he said. The REER measures the exchange rate against a basket of currencies from trading partners and factors in depreciation in those countries.
The
monetary policy committee (MPC) in its meeting on Friday left the repo rate— the rate at RBI lends to banks—unchanged at 6.5%. The six-member panel however, decided to change the policy stance from neutral to ‘calibrated tightening’—a warning that rates are headed up in future.
Explaining why RBI was not hiking rates to defend the rupee, the governor said, “The mandate of the MPC is a legislated one and it is a flexible interest rate targeting mandate. To the extent that international financial conditions, including commodity prices, affect inflation, the risks are already baked into our forecast and the decision we took today.” The governor also said that the excise rate cuts on fuel would bring inflation down.
In its policy statement, the RBI said that inflation, especially in August, was below projections as the expected seasonal increase in food prices did not materialise and food and fuel prices moderated.
Despite a high-than-expected growth in the first quarter, RBI has retained its GDP growth projection for 2018-19 at 7.4%. This assumes a slower growth of 7.1-7.3% in the second half. All members, barring Chetan Ghate, voted in favour of holding rates. Ghate had voted for a 25-basis point hike in the repo rates.
