India's new central bank governor Sanjay Malhotra appears ready to allow the rupee to move more freely against regional peers while still intervening to curb sharp volatility, according to a Bloomberg report citing people familiar with the matter.
Malhotra, who took office in December, is closely reviewing the Reserve Bank of India's (RBI) monetary intervention strategy ahead of his first monetary policy meeting in February.
Under his leadership, the RBI will break away from the tight controls maintained by his predecessor Shaktikanta Das and allow more flexibility in daily currency fluctuations. During Das's six-year tenure, the rupee's volatility was among the lowest in emerging markets, and the RBI amassed over $700 billion in foreign exchange reserves to protect the currency.
The rupee recently hit a record low of 86.7025 against the dollar before recovering marginally. The decline comes as investors pulled $2 billion from stocks and $705.5 million from fixed-income securities this year. Rising oil prices and a strong dollar have also weighed on the currency.
The policy change comes partly in response to exporters' complaints that the rupee's stability harms trade competitiveness. Exporters argued that rival nations allowed their currencies to depreciate while increasing their trade advantage. The rupee's real effective exchange rate reached 108.14 in November, an 8% overvaluation, calling for a more flexible approach.
Despite allowing for huge depreciation, the RBI is concerned about India's import bill, which heavily affects oil costs as the nation imports 90% of its crude oil. The central bank plans to closely monitor speculative positions and intervene decisively if necessary to prevent excessive swings.