Rupee policy shift? Reserve Bank of India Governor is open to currency flexibility, says a Bloomberg report

India’s new central bank governor, Sanjay Malhotra, appears ready to let the rupee move more freely against its regional counterparts while continuing to intervene to curb sharp volatility, according to a Bloomberg report citing individuals familiar with the matter.

Malhotra, who took office in December, has been closely reviewing the Reserve Bank of India’s (RBI) currency intervention strategies ahead of its first monetary policy meeting in February.

Under his leadership, the RBI may allow greater flexibility in dealing with day-to-day currency fluctuations, moving away from the stricter controls imposed by his predecessor Shaktikanta Das. During Das’s six-year tenure, rupee volatility was among the lowest in emerging markets, and the Reserve Bank of India amassed more than $700 billion in foreign exchange reserves to defend the currency.

The rupee recently fell to a record low of 86.7025 against the dollar before rebounding slightly. This decline comes as foreign outflows intensify, with investors withdrawing $2 billion from stocks and $705.5 million from fixed-income securities this year. High oil prices and the strength of the dollar also put pressure on the currency.

This policy shift is partly a response to exporters’ complaints about the stability of the rupee hurting trade competitiveness. Exporters argued that competing countries allowed their currencies to depreciate, enhancing their trade advantages. The rupee’s real effective exchange rate reached Rs 108.14 in November, 8% above its value, leading to calls for a more flexible approach.

Despite allowing further depreciation, the Reserve Bank of India remains cautious on India’s import bill, which is heavily affected by oil costs as the country imports 90% of its crude oil. The central bank plans to closely monitor speculative positions and intervene decisively if necessary to prevent excessive volatility.