No price stability without financial stability: RBI Governor Malhotra

RBI Governor Sanjay Malhotra says monetary policy and financial stability cannot be separated completely, as the central bank steps up measures to curb rupee volatility

The Reserve Bank of India (RBI) does not normally use monetary policy to address financial stability risks, but the two cannot be separated completely, Governor Sanjay Malhotra said in an interview with Moneycontrol, amid pressure on the rupee over the past few weeks. “The mandate of price stability cannot be achieved without financial stability, as a stable financial system is essential for the effective transmission of monetary policy,” Malhotra said.

 

Responding to a question on whether the monetary policy committee (MPC) would hike rates to defend the currency, he said the RBI generally follows a separation principle under which monetary policy is used to achieve price stability, while targeted regulatory, supervisory, and macroprudential tools address financial stability risks. “However, they cannot be separated completely,” he said, adding that monetary policy can affect financial stability.

  

On the rupee, Malhotra said the RBI was determined to take all necessary steps to ensure orderly movement in the foreign exchange (forex) market and curb excessive speculation. “The RBI is determined to do whatever is necessary to ensure orderly movement in the forex market,” he said.

 

“The purpose of these measures is primarily to ensure an orderly movement in the forex market. The measures taken — for example, disallowing the rebooking of cancelled forex derivatives contracts — will also check undue speculative bets. We have brought in a forex reserve requirement because we observed excessive speculative positioning on the buy side,” he said.

 

The RBI has announced a raft of measures to ease pressure on the rupee, including a dedicated dollar window for state-run oil-marketing companies and tighter rules on forex derivatives. These steps aim to reduce spot-market dollar demand and discourage speculative positions.

 

While the measures announced on Saturday aimed to reduce immediate dollar demand in the spot market and restrict derivatives positions, the RBI’s latest circular introduced further curbs.

 

In a late-evening notification on Monday, the RBI restricted non-deliverable derivatives contracts involving the rupee offered to non-residents to hedging purposes only.

 

The rupee emerged as the best-performing Asian currency on Tuesday, gaining 0.5 per cent to reach a one-month high, driven by a series of regulatory measures aimed at curbing speculative bets and likely intervention by the RBI.

 

The rupee settled at 95.28 per dollar, against the previous close of 95.78 per dollar. The Indian unit gained 1.6 per cent over the past three trading sessions.

 

The MPC raised the policy repo rate by 25 basis points to 5.5 per cent on October 7. The governor reiterated that monetary policy decisions must be guided by the principle of price stability, while recognising the importance of financial stability for effective policy transmission.