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RBI governor D. Subbarao. Photo: Indranil Bhoumik/Mint (Indranil Bhoumik/Mint)
RBI governor D. Subbarao. Photo: Indranil Bhoumik/Mint
(Indranil Bhoumik/Mint)

RBI to rollback steps after stabilisation of forex market

RBI governor D. Subbarao says ‘undue volatility of the exchange rate is harmful for growth and stability and such volatility should be curbed’

Hyderabad: The Reserve Bank of India (RBI) on Friday said liquidity tightening measures will be rolled back only after stability is restored in the forex market as volatility hurts growth.

“We will rollback these (liquidity tightening) measures only after we determine that stability has been restored to the foreign exchange market," RBI governor D. Subbarao said while addressing an award function here.

In order to rescue the declining rupee, RBI and market regulator Securities and Exchange Board of India (Sebi) had imposed various restrictions on the futures market by way of raising the margins and limiting the positions that market participants can take.

RBI, Subbarao said, had also prohibited proprietary trading in forex market by banks to curb undue speculation in rupee which was resulting in the volatility of the exchange rate. In RBI’s view, he said, “undue volatility of the exchange rate is harmful for growth and stability and such volatility should be curbed".

The rupee, which had touched lifetime low of 61.21 against a dollar on 8 July, was trading around 60.80 on Friday.

In order to contain current account deficit (CAD) and arrest the value of declining rupee, the RBI last month had raised the cost of borrowing for banks and reduced availability of funds to curb speculation in the forex market. RBI did not rollback these measures in its first quarter monetary policy which was unveiled earlier this week.

Prime Minister Manmohan Singh and finance minister P. Chidambaram had said that the measures announced by the RBI were not indicative of firming up of interest rates in the long-term and would be withdrawn once stability was achieved in the forex market.

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