Is foreign exchange rate stability desirable? Not really, data shows

RBI showing greater tolerance for exchange rate under Governor Malhotra

The recent depreciation of the rupee along with sharp fall in the country’s foreign exchange (FX) reserves has sparked a debate whether stability of the exchange rate is necessary and desirable. The rupee was one of the least volatile currencies among peers for almost two years before the current downward pressure started in September after the US Federal Reserve lowered interest rate.

 

There is empirical evidence in the last 15 years, which suggests a period of stability of the rupee is followed by extreme volatility. For example, between August 2010 and August 2011, the rupee traded in a tight range