Contrary to popular belief, a sliding rupee may not strengthen Indian exports, said D Subbarao, Governor, Reserve Bank of India here on Friday.
Nevertheless, the apex bank is not targeting any exchange rate but will intervene in the forex markets only to curb volatility and prevent disruption of macroeconomic stability.
According to him, a widening Current Account Deficit (CAD), will put further pressure on the rupee. RBI’s sustainable deficit level is between 2.5 and 3 per cent of the GDP. Currently, CAD widened to a record 6.7 per cent of the GDP during October-December, 2012.
Subbarao’s observations come at a time when the local currency hit a new low of 57.12 against a dollar and close to an all-time low of 57.33 on June 22, 2012.
“It is somewhat misleading to believe that we can get export competitiveness from our exchange rate. We need to get the same by increasing our productivity and competitiveness in other ways but not by exchange rate,” Subbarao said.
Rupee fell nearly 6 per cent against the dollar since May due to strengthening of dollar and rising oil and gold imports.
“In India, the RBI does not target any exchange rate. We intervene in the foreign exchange market only to manage the volatility and to manage the disruption to the macro-economic situation,” he said.
“The important point is that we have to be internally sure that when we enter market we are credible because for a central bank failed defence of exchange rate can be quite detrimental,” he added.
Speaking at an event organised by the Institute of Public Enterprise here, Subbaraosaid, “When you have downward pressure on the rupee as I said you have to shell your dollars. And a fair defence of the exchange rate can be worse than no defence.”
According to Y V Reddy, former Governor, RBI and the chairman of the 14th Finance Commission, a zero CAD should be the mantra of macro management over the medium term.