The Reserve Bank of India (RBI) has asserted that it will not hesitate to use all available instruments to prevent downward rupee spiral
“Usually RBI does not strongly intervene in the currency market to achieve specific exchange rate targets. However, in volatile market conditions that we see today, RBI intervention to keep markets orderly and prevent a downward spiral of rupee is justified,” said Reserve Bank of India Deputy Governor Subir Gokarn in a video message delivered to the delegates at the Confederation of Indian Industry's (CII), ‘The CFO Summit 2011' with the theme ‘Changing dynamics of finance leadership' here.
“Our broad objective in such intervention is to ensure that we find a balance between the short-term risk of the rupee spiraling downward and the medium term risk of a loss of confidence in our ability to meet our external obligations. We do have instruments to do this in the form of strategic capital controls, which can be used to enhance supply of foreign exchange. These will be used when appropriate with the goal of ensuring that the availability of foreign exchange does not become a destabilising constraint. Beyond this, if we do see the short-term risk of a downward rupee spiral escalating we will not hesitate to use all available instruments,” Dr. Gokarn added.
On rupee depreciation, he said, “Resisting currency depreciation is best done by increasing the supply of foreign currency and by expanding market participation.”