The Reserve Bank of India (RBI) is prepared to implement further actions if necessary to address speculative trading in the foreign exchange market, according to Governor Sanjay Malhotra in a recent interview Malhotra emphasised the RBI’s determination to ensure a stable and orderly foreign exchange market, stating that the central bank will take all required steps to achieve this aim.

Malhotra clarified that the RBI’s recent measures should not be interpreted as capital control actions. Instead, these initiatives are intended to ensure that the foreign exchange markets cater to genuine hedging requirements rather than speculative activities. This distinction is crucial for maintaining market integrity and supporting the economy.

On Wednesday, the rupee showed signs of strengthening in the offshore market, with dollar-rupee non-deliverable forwards declining by 0.1 per cent to 95.36. The currency had previously outperformed its Asian counterparts, rising by up to 0.8 per cent to 95.01 per dollar, following a 1 per cent increase on Monday. This positive movement was attributed to the RBI’s extended restrictions on specific types of derivative transactions, aimed at bolstering the currency’s value.

Recent RBI Interventions

The RBI has been actively intervening in the currency market to support the rupee, which has faced pressures due to various factors. Malhotra noted that a significant number of trades have been cancelled and rebooked on the same day, indicating unusual trading behaviour. He mentioned that approximately one-third of trades were either closed or cancelled on the day they were executed, raising concerns about market stability.

In addition to these measures, the RBI’s monetary policy committee recently raised the benchmark repurchase rate by 25 basis points. This decision was made to manage rising inflation and to provide support for the weakening rupee amidst a selloff by foreign investors. Despite the challenges in the external sector, India continues to experience robust domestic growth, healthy banking sector balance sheets, and improving corporate earnings.

Malhotra also indicated that the RBI is closely monitoring the evolving geopolitical landscape and its potential effects on the Indian economy. He reiterated that the central bank’s goal of maintaining price stability is intrinsically linked to financial stability, which is essential for the effective implementation of monetary policy.

Government Support for RBI Initiatives

Finance Minister Nirmala Sitharaman expressed support for the RBI’s ongoing efforts to manage volatility in the rupee during her address at the Bloomberg New Economy Forum in New Delhi earlier on Tuesday. The government acknowledges the importance of maintaining currency stability in the face of external pressures and market fluctuations.

Malhotra expressed confidence in the Indian economy’s fundamentals, suggesting that the forex markets may be overly pessimistic about its future prospects. He believes that the underlying economic indicators remain strong, which should provide a basis for optimism among market participants.

As the RBI continues to navigate the complexities of the foreign exchange market, its commitment to ensuring a stable financial environment remains paramount. The central bank is poised to take further steps as needed to protect the rupee and promote a healthy economic landscape.

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