Mumbai: The volatility in foreign exchange leave the Reserve Bank of India (RBI) with no option other than market intervention to restore orderliness in the market, deputy governor BP Kanungo told market participants in a speech.
Kanungo reiterated the central bank’s stance that intervention in the forex market is solely directed at curbing sudden turbulences and not backed by economic fundamentals. “It must be pointed out that the exchange rate dynamics in India for more than a decade has been driven by capital flows rather than current account balances…Though long-term flows related to FDI and long-term debt have been fairly stable keeping in tandem with the economic fundamentals, the portfolio flows have their own dynamics depending as much on attractiveness of returns of Indian assets as the global factors determining their risk appetite. Gyrations in the forex market in these circumstances leave no option other than market intervention to restore orderliness in the market,” Kanungo said.
He was speaking to market participants at the Forex Association of India conference in Singapore. His comments come also as the rupee has weakened to its lowest level in one year breaching the Rs 72 per dollar mark following other emerging market currencies due to further escalation in US-China trade war as both sides increased tariffs further.
Kanungo acknowledged that global economic scenario is not very encouraging. “The growth in the developed countries remains sluggish and the emerging economies including China and India, the dominant contributors to global growth in recent years, appear to be facing a challenge. Another era of accommodative monetary policy regime seems to be round the corner as evident from synchronised rate cut by several central banks,” he said.
The RBI deputy governor said there does not appear to be any possibility of quick resolution to the US-China tension, but it also does not seem to be escalating. “Whatever may be the rational and economic logic behind the competitive protectionism through tariff barriers, it is certainly contributing to the global economic slowdown,” he said.
Kanungo said that free trade has been one of the main planks of globalisation and had enhanced welfare amongst nations. “If all the trading countries impose retaliatory tariffs, it becomes a negative-sum game affecting global welfare and welfare of individual nations to a varied extent… Globalisation is an irreversible process and has been progressing for millennia. True, the process of globalisation has brought problems and discontent in its wake, but wisdom lies in addressing them rather than disbanding the process.”
Source: economictimes.indiatimes.com