RBI should avoid aiming for a specific exchange-rate level, says Neelkanth Mishra
Axis Bank chief economist Neelkanth Mishra recommends that the Reserve Bank of India adopt a flexible approach to foreign exchange interventions rather than trying to defend a particular rupee level. He argues that targeting a fixed rate can be costly and may send the wrong signals to markets.
Why flexibility matters
- Reduces depletion of reserves: Constantly defending a single level can drain foreign exchange reserves without addressing underlying market drivers.
- Limits market gaming: When authorities appear committed to a precise rate, traders can speculate against that stance, increasing volatility.
- Focuses on stability, not a number: Intervening to smooth swings or counter disorderly moves is often more effective than trying to achieve a fixed target.
Practical implications for policy
Mishra’s view suggests the central bank should prioritize tools and communication that calm markets rather than pinning down a specific exchange-rate figure. That could include measured interventions to curb excessive volatility, transparent guidance on objectives, and coordination with broader macroeconomic policy to address fundamentals like inflation and external balances.
What markets should expect
Under a flexible strategy, investors can expect the RBI to act when currency moves are disruptive, but not to defend every incremental change. The emphasis would be on preserving macro stability and reserves, keeping interventions predictable in intent even if unpredictable in timing or magnitude.
In short, Mishra favors a pragmatic, market-friendly RBI approach: intervene to smooth bumps, not to hit a pre-set level.