RBI’s Effective Pegging of USD-INR Exchange Rate
In the past year, the Reserve Bank of India (RBI) has taken decisive measures to peg the USD-INR exchange rate, resulting in an exchange rate stability comparable to other pegged currencies such as the Dirham and Hong Kong Dollar. This proactive intervention by the RBI has led to a significant reduction in implied volatility for USD-INR, offering stability in uncertain financial markets.
USD/INR’s Remarkable Stability Amidst Turbulence
While many emerging market currencies experienced substantial fluctuations of 20-25% against the US Dollar in 2023, USD/INR has maintained a remarkably tight trading range, primarily attributed to RBI’s continuous intervention. This period marks the lowest one-year movement in the last two decades, highlighting the RBI’s commitment to exchange rate stability.
IMF’s Revision and RBI Governor’s Perspective
The International Monetary Fund (IMF) responded to INR’s performance between December 2022 and October 2023 by revising India’s exchange rate regime from a “floating” status to a “stabilized arrangement.” RBI Governor has emphasized that understanding currency market interventions requires a nuanced perspective beyond binary categorizations. These interventions are aimed at curbing volatility and enhancing India’s foreign exchange reserves, reinforcing the RBI’s commitment to exchange rate stability.