Intervention aims to maintain stability, orderliness: RBI Governor Malhotra

Amid speculation of a hands-off approach in the foreign exchange intervention policy, Reserve Bank of India (RBI) Governor Sanjay Malhotra reiterated the central bank’s stated strategy of maintaining orderliness and stability, adding that the objective is also not to compromise market efficiency.

 

“RBI’s exchange rate policy has remained consistent over the years. Our stated objective is to maintain orderliness and stability without compromising market efficiency,” Malhotra said while announcing the decision of the six-member monetary policy committee (MPC), which decided to reduce the policy repo rate after almost five years.

 

The sharp pace of rupee depreciation since December—3.5 per cent—compared to 1.3 per cent between April and November ignited debate over whether the central bank under Malhotra was more tolerant of the exchange rate’s depreciation. Malhotra took charge as the 26th Governor of the RBI on December 11, 2024, succeeding Shaktikanta Das.

 

 

Malhotra said that foreign exchange market interventions are intended to smooth out excessive and disruptive volatility rather than target any specific exchange rate level or band. The rupee’s exchange rate, he affirmed, is determined by market forces.

 

“Accordingly, our interventions in the forex market focus on smoothing excessive and disruptive volatility rather than targeting any specific exchange rate level or band. The exchange rate of the Indian rupee is determined by market forces,” he said.

 

Market participants said that the Governor’s statement suggests that the RBI is indicating a willingness to allow market-driven depreciation while maintaining some level of intervention.

 

“If the direction and the theme are basically depreciation, they’ll let that happen. The pace of intervention, the style of intervention may vary depending on the need. They will watch, they will basically protect in some form, to some extent, but otherwise, whatever direction the market is taking, they will let it go,” said Anshul Chandak, head of treasury at RBL Bank.

 

On Friday, the RBI intervened in the foreign exchange market by selling dollars to stabilise the rupee ahead of the policy decision announcement. The rupee opened stronger at 87.46 following the intervention, said dealers.

 

During the day, the rupee appreciated to a high of 87.32 per dollar but later gave up some gains by the end of the trade, settling at 87.43 per dollar on Friday, compared to the previous close of 87.59 per dollar.

 

Experts said that the RBI appears less concerned with short-term rupee volatility and more focused on its medium-term alignment with global peers. However, the rupee’s performance will also depend on whether the RBI allows appreciation or uses it to build reserves, they said. 

 

Malhotra said in the post-monetary policy press conference that while depreciation affects imported inflation, the larger concern is its impact on growth, consumption, and investment amid global uncertainties.

 

“This implies that the rupee’s movement is expected to align more closely with its peers, and the RBI is less concerned with day-to-day volatility but more focused on the medium-term alignment of the rupee,” said Sakshi Gupta, principal economist at HDFC Bank.

 

“We do see the possibility of pressures easing on the rupee by the middle of the year as trade war uncertainties moderate and the US Federal Reserve resumes its rate cut cycle. However, whether this could translate into gains in the rupee against the dollar depends on if the RBI’s forex strategy is two-way or tilted towards using appreciation episodes to shore up its reserves,” Gupta added.

 

The rupee depreciated by 3.2 per cent against the US dollar since November 6, 2024, the day the presidential election results were announced in the US, largely mirroring the 2.4 per cent appreciation in the dollar index during the same period.

 

The yield on the benchmark government bond rose by four basis points to 6.70 per cent, up from the previous close of 6.66 per cent. Market participants said that a 25 basis point rate cut was already priced in, and bond yields had rallied earlier in anticipation. After the rate decision, yields retraced. The yields also hardened as some traders had expected additional liquidity measures. Additionally, some traders sold bonds after the deferral of liquidity coverage ratio (LCR) norms by at least one year.

 

“The market had already rallied on expectations of a rate cut. The market is retracing, and in the next two days, the yield on the benchmark government bond will again settle around 6.66 per cent,” said the treasury head at a private bank. “Some offloading was there when the LCR norm was deferred. The bond market was looking for some additional announcement on open market operations (OMO) and variable rate repos (VRR). Apart from that, the policy was along expected lines,” he added.

 

Banking system liquidity turned into a deficit in December 2024 and January 2025. The decline in liquidity was primarily driven by advance tax payments in December, capital outflows, forex operations, and a significant rise in currency circulation in January.

 

On Thursday, the net liquidity in the banking system was in a deficit of Rs 69,755 crore, according to the latest data from the RBI.

 

Malhotra said the RBI is committed to providing sufficient system liquidity. “We have taken a number of steps in this regard. We will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity conditions,” he said.