RBI Governor Signals Shift to More Flexible Rupee Amid Currency Volatility

New RBI Governor Sanjay Malhotra hints at easing currency intervention policies, prioritising stability while allowing market-driven rupee movements.

January 14, 2025: Reserve Bank of India (RBI) Governor Sanjay Malhotra, who assumed office in December, is indicating a more flexible approach toward the rupee’s movements as he prepares for his first monetary policy meeting in February. According to sources familiar with internal discussions, Malhotra appears inclined to allow the rupee to fluctuate in line with market trends while continuing the RBI's efforts to prevent excessive volatility and speculative attacks.

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The central bank will no longer target a specific exchange rate but instead allow for wider fluctuations if economic circumstances warrant, the insiders added. This approach marks a shift from the currency management style of former Governor Shaktikanta Das, who maintained one of the tightest reins on the rupee among emerging markets.

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Currency Movements Under New Leadership
Following the Bloomberg report of Malhotra's intentions, the rupee briefly hit a record low of 86.70 per dollar before stabilizing at 86.58 in Mumbai by 2:28 p.m. The currency has already depreciated by 2% since Das's departure and showed its sharpest decline in two years earlier this week due to surging oil prices and a strong US dollar.

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The RBI’s strict policies under Das helped build foreign reserves exceeding $700 billion and kept rupee volatility low. However, exporters criticized this approach, stating it affected India's trade competitiveness when other nations allowed their currencies to depreciate.

Balancing Stability and Competitiveness
While Malhotra appears more open to depreciation, the RBI remains vigilant about India's import bill, especially its oil imports, which account for 90% of domestic energy consumption. A weaker rupee drives up the cost of imports, impacting India's economy.

The central bank is also closely monitoring speculative market positions and is prepared to intervene decisively if needed. Officials believe the currency may stabilize after Donald Trump is sworn in as the US President next week, bringing more clarity to global financial markets.

Looking Ahead
Exporters and investors alike will be watching closely to see how Malhotra's leadership shapes India’s monetary and currency policies in the coming months. Market watchers expect further insights during the upcoming monetary policy meeting in February.

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RBI, Sanjay Malhotra, rupee depreciation, Indian currency, monetary policy, Shaktikanta Das, currency exchange, oil imports, forex reserves, Indian economy.