RBI’s currency challenge4 min read . Updated: 25 Mar 2015, 07:14 PM IST
RBI agrees that the rupee is overvalued, but continues to maintain that it will not intervene
Divergence in monetary policy among the leading economies is playing out in the currency market. While the dollar, backed by better economic prospects and expectations of higher interest rates, is strengthening, the euro has been weakening on account of monetary easing by the European Central Bank. The Dollar Index, which reflects the strength of the dollar against leading currencies, has gained over 20% in the past one year. Meanwhile, the euro has fallen around 10% against the dollar since the start of 2015. The expectation is that a rate hike by the Federal Reserve will attract more capital to the US and can result in volatility in the financial market. In fact, Christine Lagarde, managing director, International Monetary Fund, in her recent address at the Reserve Bank of India (RBI), said that even if the process of normalization of monetary policy in the US is managed well, financial market volatility could result in potential stability risks. This is the reason why every single word in the Fed’s statement is being read by financial markets so carefully.