Former RBI Governor YV Reddy at an event in Hyderabad, India. (Photographer: Namas Bhojani/Bloomberg News.)

YV Reddy Cautions On Risks Of Government Officials Commenting On Exchange Rate

As the rupee continues to depreciate, former Reserve Bank of India Governor YV Reddy cautioned on the risks of government officials commenting on the exchange rate.

Over the past month or so, a number of government officials have noted that a weaker exchange rate is beneficial for the economy. That, together with limited intervention from the RBI, has exacerbated the fall in the rupee. “Local factors for depreciation include limited intervention by the RBI and limited concerns, in our view, over forex depreciation....” brokerage house Nomura had said in a note last week.

On Monday, the rupee fell to another record low of 72.67 against the U.S. dollar. It recovered after an unnamed government official was quoted as saying that the RBI and government could consider measures like raising foreign currency deposits to protect the rupee. The RBI has not signalled any such measures yet.

Reddy noted that comments related to the exchange rate from different quarters can send confusing signals to the market. There are two different things—exchange-rate regime and the exchange rate, Reddy explained. While the exchange-rate regime is determined by the political leadership, the management of the exchange rate is under the purview of the RBI.

As far as the exchange rate is concerned, it is best left to the RBI, Reddy said. He was speaking to BloombergQuint as part of an interview on the global financial crisis, 10 years after the collapse of Lehman Brothers.

There should be an understanding of the relative roles. My understanding of the situation is that the exchange rate regime is prescribed by the government. The exchange rate is managed by the RBI. Those respective roles have been respected by and large.
YV Reddy, Former RBI Governor

Also read: The Rupee Is Falling and India Should Let It

Reddy recalled an incident in the past when former RBI Governor Bimal Jalan had to ask the government of the day to stop commenting on the currency. When the earlier NDA government was taking over, there was a belief expressed in favour of a strong rupee. At that time, Jalan made a presentation to the cabinet, essentially asking them to stop commenting on the exchange rate.

Reddy added that if any message has to be given on the exchange rate, it can at best be given by the political leadership. Understanding exchange rate movements requires a level of attention and detail. “I would be inclined to leave it to the professionals...”

Recent comments from government officials justifying a weaker rupee have come against the backdrop of concerns that export growth is being hurt by an overvalued currency.

If you are making a statement like that (in support of a weaker rupee), there has to be a purpose, Reddy said recalling a speech made by him in Goa in 1997, where he said that the rupee was overvalued as per the real effective exchange rate. “That comment was made after discussions with the government. We wanted the rupee to depreciate and we chose that mechanism,” Reddy said.

If I have too many statements from too many institutions and not the main institution which is responsible (RBI), that confuses the issues....Whether it’s weak or strong, good or bad, we are not in a planning era where we can determine what value is good for the economy.
YV Reddy, Former RBI Governor

Broadly the currency is in line with the economy’s fundamentals and the RBI has adequate means to intervene. However, any decision on the size and timing of intervention would need to take into account the costs of intervention. You can’t go against the entire market, Reddy said while explaining that it is a matter of judgement.

“Whenever I was asked whether the exchange rate is right or not, I would say–I don’t know...I can’t define God but I can recognise the devil. When I see the devil, I will intervene.”

Also read: Rupee Weakness Is A ‘Healthy Correction’, Says JPMorgan’s Sajjid Chinoy