RBI's conflicting objectives: Focus on inflation, growth over exchange rate

The law mandates the RBI's primary objective is maintaining price stability, keeping an eye on growth. It does not mention managing the exchange rate

Since November last year, the Reserve Bank of India (RBI) has allowed the rupee to weaken against the dollar, ending the effective peg that it had maintained for nearly two years. However, it has continued to intervene in the foreign-exchange (FX) market to limit the rupee’s decline, keeping it the least volatile major currency in Emerging Asia with a modest 3 per cent depreciation. This has, however, strained monetary policy and tightened liquidity at a time when the economy is weak and needs support.

 

To understand how this has happened, we must examine the link between monetary policy, currency management,