Ashima Goyal, a former member of the Monetary Policy Committee (MPC) and a noted economist, has asserted that the committee’s focus will remain firmly on domestic inflation and growth, not the currency’s movements.
The rupee fell to a new record low on Wednesday, December 3, crossing the mark of 90 against the US Dollar
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Goyal explained that while the current regime allows the currency to float with market movements, the RBI’s long-standing policy is to intervene to prevent “excess volatility and persistent real misalignments.”
According to her, the central bank continues to step in when the currency deviates too far from its equilibrium. “This regime is working. They have reserves and other ways of intervention. So, the interest rate is not tied to the rupee,” Goyal added.
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Goyal has been advocating for one since August and feels a 25 bps reduction is appropriate.
While acknowledging that a sharp currency fall can have macroeconomic consequences by impacting growth calculations and feeding into inflation through costlier imports, Goyal downplayed immediate financial stability risks.
This view was echoed by V Lakshmanan, the Head of Treasury at Federal Bank. He concurred that the RBI has never made currency a core factor in its monetary policy dissemination.
While acknowledging that bankers might welcome a commentary on the currency, he does not anticipate a significant statement. “The policy statement would clearly again hinge upon the broader parameters of inflation and growth,” Lakshmanan said.
He expects that, at most, the RBI will factually record the rupee’s depreciation without offering any specific ‘boosting statement’.
Addressing the role of communication, Goyal emphasised its importance in calming market sentiment. She warned that if the rupee crosses the psychological 90-mark, a trend-following mentality could lead to ‘excess movements’. “A statement that the RBI is very much there in the market in order to prevent excess volatility should be calming for markets,” she suggested.
When asked about the need for OMO support, Lakshmanan explained that even a basic indication of upcoming OMO purchases would be a strong starting point. Such a signal would reassure the market that the RBI is aware of tightening liquidity conditions and is prepared to respond.
For full interview, watch accompanying video
