Reserve Bank of India (RBI) Governor Sanjay Malhotra emphasized the intrinsic link between price stability and financial stability, stating that price stability cannot be achieved without a sound financial system to enable effective monetary policy transmission. In an interview with Moneycontrol conducted amid ongoing pressure on the Indian rupee, Malhotra clarified that while the RBI typically adheres to a separation principle—using monetary policy for price stability and micro/macroprudential tools for financial stability—the two domains cannot be entirely decoupled as monetary decisions inherently influence broader financial conditions. Addressing whether the Monetary Policy Committee (MPC) would raise interest rates to defend the local currency, the governor reiterated that policy decisions must primarily remain guided by price stability goals, even as the MPC recently raised the policy repo rate by 25 basis points to 5.5 per cent on October 7. On foreign exchange dynamics, Malhotra affirmed that the RBI is determined to execute all necessary measures to ensure orderly movements in the foreign exchange market and curb excessive speculation. To counter recent pressure on the domestic currency, the central bank announced a comprehensive suite of regulatory actions aimed at easing spot-market dollar demand and checking speculative positioning. These measures include establishing a dedicated dollar window for state-owned oil-marketing companies, tightening restrictions on foreign exchange derivatives, prohibiting the rebooking of cancelled forex derivative contracts, and introducing a forex reserve requirement to curb excessive buy-side speculative bets. Building on these steps, the RBI issued a late-evening circular restricting non-deliverable derivative contracts involving the rupee offered to non-residents exclusively to hedging purposes. These decisive regulatory interventions, paired with likely central bank market interventions, spurred a notable recovery for the Indian currency. The rupee emerged as the top-performing Asian currency, strengthening by 0.5 per cent to hit a one-month high of 95.28 per dollar compared to its previous close of 95.78, marking a total gain of 1.6 per cent across three consecutive trading sessions. Overall, Malhotra’s remarks underline the central bank’s dual commitment to maintaining robust policy transmission channels and deploying targeted regulatory instruments to prevent currency volatility from disrupting broader macroeconomic stability.
