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MUMBAI : The Reserve Bank of India has “zero tolerance for volatility" of the rupee and will continue to engage in the foreign exchange market without having a particular level in mind, governor Shaktikanta Das said on Friday.

“We will continue to engage with the forex market and ensure that the rupee finds its level in line with its fundamentals. I would like to reiterate that we have no particular level of the rupee in mind, but we would like to ensure its orderly evolution, and we have zero tolerance for volatile and bumpy movements," Das said at a Bank of Baroda event.

Das’s remarks come after the rupee’s slide from 77.50 last month to this week’s 80 to the dollar. To be sure, some experts said RBI intervention has helped support the domestic currency.

Owing to RBI action, including measures to encourage inflows of foreign exchange, the movement of the rupee has been relatively smooth and orderly, Das said. By avoiding sudden and volatile shifts, RBI has ensured that expectations remain anchored and the forex market functions in a stable and liquid manner, he said.

“Recent developments in the forex market have generated intense debate, including predictions of the rupee dropping to record lows as foreign portfolio funds exit India. I would like to address the issue in a balanced and factual manner," he said.

Das said spillovers from the global monetary policy tightening, the geopolitical situation, elevated commodity prices, especially crude, and the lingering effects of the pandemic, all coming together, have become overwhelming for all countries worldwide. Even currencies such as the Japanese yen, the euro and the British pound have not been spared.

“Portfolio funds are selling off assets and fleeing to safe haven. Emerging market economies (EMEs) are particularly affected by capital outflows, currency depreciation and reserve drawdowns, complicating macroeconomic management in these countries."

Their impact on India, however, has been relatively modest, Das said, adding that the rupee is holding up well relative to both advanced and EME peers.

“This is because our underlying fundamentals are strong, resilient and intact. The recovery is gradually strengthening. The current account deficit is modest. Inflation is stabilizing. The financial sector is well-capitalized and sound. The external debt-to-GDP ratio is declining. The foreign exchange reserves are adequate."

That apart, realizing that there is a genuine shortfall of forex in the market relative to demand because of import and debt servicing requirements and portfolio outflows, RBI has been supplying dollars to the market to ensure adequate liquidity, Das said, adding that this is the very purpose for which RBI had accumulated reserves when capital inflows were strong.

“And, may I add, you buy an umbrella to use it when it rains," Das said.

He said a predominant part of the outstanding external commercial borrowings (ECBs) is effectively hedged. Citing data from the June 2022 Financial Stability Report (FSR), Das said of the outstanding ECBs of $180 billion, 44% or $79 billion is unhedged. The unhedged amount includes about $40 billion in liabilities of public sector companies.

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