RBI intervenes to arrest rupee depreciation; debate on intervention vs. free float
The Reserve Bank of India (RBI) intervened heavily in the foreign exchange market, deploying dollar sales via state-run banks to halt the rupee's persistent slide, which had neared 97 against the U.S. dollar. This intervention caused the rupee to rally by about 70 paise. The article then delves into the debate on whether the rupee should be allowed to depreciate freely or if intervention is necessary. Proponents of non-intervention argue that a weaker rupee naturally curtails imports and boosts exports, adjusting the current account deficit. However, the counter-argument highlights that a falling rupee, especially when driven by speculation and rising import costs of essential goods like oil, can fuel inflation and prolong instability, necessitating intervention to break negative feedback loops.
Key Points
- The RBI intervened in the foreign exchange market by selling dollars to prevent further depreciation of the rupee.
- The rupee had been experiencing sustained losses, nearing 97 against the U.S. dollar before intervention.
- There is a debate on whether the rupee should be allowed to depreciate freely or if RBI intervention is justified.
- Arguments against intervention suggest a weaker rupee naturally corrects trade imbalances by boosting exports and curbing imports.
- Arguments for intervention emphasize that speculative-driven depreciation and rising import costs can lead to inflation and prolonged economic instability.
Exam Facts
- Rupee fell to near 97 against the U.S. dollar.
- RBI deployed dollar sales via state-run banks.
- Rupee rebounded 50 paise to settle at 96.36 against the U.S. dollar.
- Harvard professor Gita Gopinath mentioned as advocating for non-intervention.
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