Tue Jan 14 09:41:20 UTC 2025: ## India’s New Central Bank Governor Allows More Rupee Flexibility

**Mumbai, India** – India’s Reserve Bank of India (RBI) is adopting a more flexible approach to managing the rupee, marking a shift from its predecessor’s tightly controlled regime. Sources familiar with the central bank’s thinking indicate that Governor Sanjay Malhotra, who assumed office in December, is allowing the rupee more freedom to fluctuate in line with regional currencies, while still intervening to curb excessive volatility.

Malhotra’s approach contrasts sharply with that of his predecessor, Shaktikanta Das, who maintained exceptionally low rupee volatility over his six-year tenure. Under Das, the RBI amassed over $700 billion in foreign exchange reserves, largely used to defend the currency. This resulted in the rupee having the lowest volatility among emerging markets, second only to the pegged Hong Kong dollar. However, this stability came at a cost, contributing to an overvaluation of the rupee by approximately 8% in November, according to a 40-country trade-weighted gauge.

The new policy acknowledges concerns raised by exporters who felt the strong rupee hampered their competitiveness. Furthermore, recent portfolio outflows, totaling approximately $2 billion from local shares this year, highlighted that a stable exchange rate alone was insufficient to attract and retain foreign investment.

While the RBI aims to avoid targeting a specific rupee level, it will intervene to prevent excessive fluctuations and speculative attacks. The recent depreciation of the rupee, which briefly touched a record low of 86.7025 per dollar following the release of this news, is viewed as a correction to the previous overvaluation. The RBI anticipates some rupee strengthening after the upcoming US presidential inauguration and expects greater stability by the time of its next monetary policy meeting in February.

Despite the increased flexibility, the RBI remains mindful of India’s substantial import bill, particularly for oil (around 90% of which is imported). The central bank is closely monitoring open positions in the foreign exchange market and will intervene decisively to counter any speculative build-up. The goal is to allow a more market-determined exchange rate while safeguarding against undue risk.

Read More