The RBI's intervention decouples the natural value of the rupee from the market. In a flexible exchange rate policy, rates move up and down according to seasonal changes in the economy, which helps to stabilize production. The current intervention has kept the rupee's value stable, which can make indian products more expensive in foreign markets.
Lack of transparency
The RBI does not disclose its intervention, which creates confusion among private sector participants in the foreign exchange market. This makes it difficult for the market to get signals about when and why the exchange rate is changing.
Is a fall in exchange rate always harmful?
The reality is that the exchange rate often signals the relative strength of the economy. Most developing economies run deficits on their trade and current accounts. The impact of a fall depends on several factors; it may benefit exporters but make imports of raw materials costlier.
Current developments
The rupee had fallen to its lowest level against the dollar. This fall was happening despite the bank OF INDIA' target='_blank' title='reserve bank of india-Latest Updates, Photos, Videos are a click away, CLICK NOW'>reserve bank of india handling the situation. After the US Federal Reserve raised the interest rate, the decline in the rupee had intensified. However, just three days ago, the Federal bank has announced a reduction in interest rates.
Role of RBI
RBI plays an important role in maintaining a balance between foreign transactions and the flow of indian currency. If RBI does not intervene, the rupee may fall or fluctuate excessively, which may lead to instability in the market.
click and follow Indiaherald WhatsApp channel