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India’s new central bank governor has shown a willingness to allow the rupee to move more freely in tandem with peers in the region while still intervening in the foreign-exchange market to curb excessive moves, according to people familiar with the regulator’s thinking.
Reserve Bank of India Governor Sanjay Malhotra, who took office in December, has held multiple meetings with departments at the central bank ahead of his first monetary policy meeting in February, the people said, asking not to be identified as the discussions are private. He’s showed keen interest in the RBI’s currency intervention functions and expressed no opposition when his team explained the recent movements in the rupee and the need to allow it to depreciate, the people said.
The RBI’s overall objective is still to avoid targeting a specific level for the rupee and to intervene regularly to curb excessive volatility and prevent any speculative attacks, the people said. The new governor may allow a wider gap in the closing level of the currency from the previous day’s close if the situation warrants, the people said, without providing more details.
The signals from the new governor suggest a departure from his predecessor, Shaktikanta Das, who kept a tight rein on the currency. Under Das’s six years at the RBI, the rupee’s volatility slid to the lowest among emerging markets, second only to the pegged Hong Kong dollar. The RBI under Das built up the world’s fourth-biggest foreign exchange reserves of more than $700 billion and then used it to defend the currency.
The RBI didn’t immediately respond to an email seeking further information.
The rupee weakened sharply after the Bloomberg News report, losing as much as 0.14% to touch a new record low of 86.7025 per dollar. It recouped losses soon after to trade at 86.5875 per dollar as of 2:28 p.m. in Mumbai.
Since Das’s departure, the rupee has slumped 2% against the dollar with the one-month implied volatility jumping to its highest in more than a year. The currency tumbled by the most in nearly two years Monday to cross the symbolic 86 a dollar level, fueled by a strong US currency and rising oil prices after sweeping sanctions on Russian energy.
The rupee was among the better performers in Asia last year, falling 2.8% against the dollar. The RBI’s tight grip over the currency has meant that the currency’s real effective exchange rate, or inflation-adjusted trade competitiveness, against its peers has risen to a record. The 40-country trade-weighted gauge stood at a historic high of 108.14 in November, suggesting an overvaluation of about 8%.