The Reserve Bank of India’s (RBI) currency management policy of building up foreign exchange reserves and intervening in the currency market to smoothen volatility may be at odds with what the International Monetary Fund (IMF) prescribes, but the domestic approach has led to better outcomes than what would otherwise have been, RBI deputy governor Poonam Gupta said Wednesday.
“I would also like to remind the likes, perhaps of the IMF, that excessive volatility of exchange rate is not necessarily a good thing,’’ Gupta said at an event in Mumbai. “IMF recommends to emerging markets that they should not step in at all. Some of the stated policies are that why do emerging markets hold buffers when we have all kinds of contingency lines? Literature shows that those are not necessarily better outcomes.”
The RBI has maintained it intervenes in the currency market to curb excess volatility and does not target a particular level for the local monetary unit. However, in recent times, the RBI has heavily intervened to prevent the rupee from crossing the 89 mark against the dollar.
On a query on corporate investments, Gupta said the answer to the puzzle of poor investment by companies may lie in capacity utilization levels. The recent push to consumption through goods and services tax (GST) rate cuts and easier monetary policy should raise capacity utilization levels to such highs that companies begin to expand capacities.
“This current boost on consumption can help bridge that capacity utilization rate to a level where new investment can come into the economy,’’ Gupta said. “If that happens, it will help utilize your existing capacity in select sectors so that they can then invest more.’’
'Room to Ease'
The deputy governor also said that there is room for easing monetary policy since growth is below the aspiration level while inflation remains benign.
“We are growing very well at 6.5 and our forecast for this is 6.8 but that's not India's destination. That's not our potential. That's not our aspiration,” Gupta said.
During the October 1 monetary policy review, the RBI has maintained the policy repo rate at 5.5%, revised growth forecast upward to 6.8% from 6.5%, and lowered the inflation forecast to 2.6% from 3.1%
Gupta further said it's a combination of many things that make growth possible.
“At times I used to say if it was possible to grow just based on the strength of the monetary policy, many more countries would have been richer today,” she stated.
On the flexible inflation targeting wherein the RBI has sought views from various stakeholders, she said the majority have suggested that RBI continue to target headline inflation.
At present, the RBI targets a 4% inflation, with a 2% tolerance band in either direction.
“I would also like to remind the likes, perhaps of the IMF, that excessive volatility of exchange rate is not necessarily a good thing,’’ Gupta said at an event in Mumbai. “IMF recommends to emerging markets that they should not step in at all. Some of the stated policies are that why do emerging markets hold buffers when we have all kinds of contingency lines? Literature shows that those are not necessarily better outcomes.”
The RBI has maintained it intervenes in the currency market to curb excess volatility and does not target a particular level for the local monetary unit. However, in recent times, the RBI has heavily intervened to prevent the rupee from crossing the 89 mark against the dollar.
On a query on corporate investments, Gupta said the answer to the puzzle of poor investment by companies may lie in capacity utilization levels. The recent push to consumption through goods and services tax (GST) rate cuts and easier monetary policy should raise capacity utilization levels to such highs that companies begin to expand capacities.
“This current boost on consumption can help bridge that capacity utilization rate to a level where new investment can come into the economy,’’ Gupta said. “If that happens, it will help utilize your existing capacity in select sectors so that they can then invest more.’’
'Room to Ease'
The deputy governor also said that there is room for easing monetary policy since growth is below the aspiration level while inflation remains benign.
“We are growing very well at 6.5 and our forecast for this is 6.8 but that's not India's destination. That's not our potential. That's not our aspiration,” Gupta said.
During the October 1 monetary policy review, the RBI has maintained the policy repo rate at 5.5%, revised growth forecast upward to 6.8% from 6.5%, and lowered the inflation forecast to 2.6% from 3.1%
Gupta further said it's a combination of many things that make growth possible.
“At times I used to say if it was possible to grow just based on the strength of the monetary policy, many more countries would have been richer today,” she stated.
On the flexible inflation targeting wherein the RBI has sought views from various stakeholders, she said the majority have suggested that RBI continue to target headline inflation.
At present, the RBI targets a 4% inflation, with a 2% tolerance band in either direction.
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