`You buy an umbrella to use when it rains`: RBI Governor on using forex reserves

Mumbai: Due to the RBI actions, including measures to encourage inflows, the movements of the rupee have been relatively smooth and orderly, RBI Governor Shaktikanta Das said on Friday.

Speaking at a conference, Das said, "By eschewing sudden and volatile shifts, we have ensured that expectations remain anchored and the forex market functions in a stable and liquid manner."

Das said in recognition of the fact that there is a genuine shortfall of supply of forex in the market relative to demand because of import and debt servicing requirements and portfolio outflows, the RBI has been supplying US dollars to the market to ensure that there is adequate forex liquidity.

"After all, this is the very purpose for which we had accumulated reserves when the capital inflows were strong. And, may I add, you buy an umbrella to use when it rains!

"We will continue to engage with the forex market and ensure that the rupee finds its level in line with its fundamentals. I would like to reiterate that we have no particular level of the rupee in mind, but we would like to ensure its orderly evolution and we have zero tolerance for volatile and bumpy movements," Das said.

Recent developments in the forex market have generated intense debate, including predictions of the rupee dropping to record lows as foreign portfolio funds exit India, Das said and addressed the issue.

Das said spillovers from the global monetary policy tightening, the geopolitical situation, the still elevated commodity prices   especially crude -- and the lingering effects of the pandemic, all coming together, have become overwhelming for all countries the world over. Even reserve currencies such as the Japanese yen, the Euro and the British pound sterling have not been spared.

Portfolio funds are selling off assets and fleeing to safe haven. Emerging market economies (EMEs) are particularly affected by capital outflows, currency depreciations and reserve drawdowns, complicating macroeconomic management in these countries, he added.

The impact of these overwhelming spillovers on India has been relatively modest. In fact, the Indian rupee is holding up well relative to both Advanced and EME peers, Das said.

"This is because our underlying fundamentals are strong, resilient and intact. The recovery is gradually strengthening. The current account deficit is modest. Inflation is stabilizing. The financial sector is well-capitalised and sound. The external debt to GDP ratio is declining. The foreign exchange reserves are adequate," Das added.