In a recent interview, Axis Bank’s chief economist Neelkanth Mishra shared his views on the Reserve Bank of India’s (RBI) interventions in the foreign exchange market. Mishra believes that it would be wiser for the RBI to not target a particular level in its interventions. This statement has sparked a debate among economists and market experts, with some supporting Mishra’s views and others questioning the effectiveness of such a strategy. In this article, we will delve deeper into Mishra’s statement and understand the rationale behind it.
Firstly, let us understand what RBI’s interventions in the foreign exchange market mean. The RBI intervenes in the foreign exchange market by buying or selling foreign currencies to maintain the value of the Indian rupee. This is done to ensure stability in the currency’s value and to prevent any sharp fluctuations. In the past, the RBI has targeted a particular level for the rupee, which has been criticized by many experts for being an unsustainable strategy.
Mishra argues that targeting a particular level for the rupee can lead to unintended consequences. He believes that the RBI should focus on managing volatility rather than targeting a specific level. This approach would allow the rupee to find its natural level, which is determined by market forces. Mishra also points out that targeting a particular level can lead to a drain on the country’s foreign exchange reserves, which can have long-term implications on the economy.
One of the main reasons for Mishra’s stance is the current global economic scenario. With the ongoing trade tensions between the US and China, there is a lot of uncertainty in the global markets. Mishra believes that in such a scenario, it would be difficult for the RBI to maintain a particular level for the rupee. Moreover, targeting a specific level can also lead to a loss of credibility for the central bank if it fails to achieve its target.
Another factor that supports Mishra’s views is the recent depreciation of the rupee. In the past few months, the rupee has depreciated significantly against the US dollar, reaching an all-time low of 74.48 in October. This has raised concerns among investors and has led to a flight of capital from the country. Mishra believes that if the RBI continues to target a particular level, it would require a significant amount of intervention, which can further deplete the country’s foreign exchange reserves.
Mishra’s statement has also been supported by other economists, who believe that targeting a particular level for the rupee is not a sustainable strategy. They argue that the RBI should focus on maintaining a stable and predictable exchange rate, which would provide a conducive environment for businesses and investors. This would also help in attracting foreign investments, which are crucial for the country’s economic growth.
However, there are some who disagree with Mishra’s views. They argue that targeting a particular level for the rupee is necessary to maintain stability in the currency’s value. They believe that a volatile currency can have a negative impact on the economy, especially on sectors like imports and exports. Moreover, a depreciating rupee can also lead to inflation, which can have a direct impact on the common man’s purchasing power.
In conclusion, Mishra’s statement has sparked a healthy debate on the effectiveness of RBI’s interventions in the foreign exchange market. While some support his views, others have raised valid concerns about the impact of a volatile currency on the economy. However, it is important to note that the RBI’s primary objective is to maintain price stability and promote economic growth. Therefore, it is crucial for the central bank to adopt a balanced approach while managing the rupee’s value. As the global economic scenario continues to evolve, it is imperative for the RBI to reassess its strategies and make necessary changes to ensure the country’s economic stability.
