India Must Prepare To Manage Volatility Risks In Forex Market, Says RBI Deputy Governor The deputy governor said that India has increasingly aimed to promote trade denominated in Rupees
By Teena Jose
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The deputy governor of the Reserve Bank of India (RBI), M Rajeswar Rao has said that India needs to gear up to manage the inevitable volatility that will emerge in the foreign exchange market as the country progresses further towards internationalisation of the rupee. The RBI published a copy of the speech on its website on Thursday.
"Further dynamics are likely to emerge as we progress down the path of internationalisation of the Rupee. It is now widely accepted that while internationalisation and a freer capital account comes with its own set of benefits, it is not without risks and that freer capital flows come with their own set of challenges, the primary one being that of volatility and we need to gear up to manage that. We are seeing a good amount of interest in the Rupee trading arrangements that we have been endeavouring to put in place. If our efforts towards Rupee invoicing bear fruit, domestic exporters and importers will not need to hedge, but there will be other opportunities in the form of their non-resident counterparts who may need to hedge," said Rao in a statement.
However, the deputy governor did not expand on how to manage the volatility in his comments, which were part of his keynote address at a conference organised by the Foreign Exchange Dealers' Association of India (FEDAI) on Sunday.
An international currency is one that is freely available to non-residents, essentially to settle cross-border transactions, and in the case of the rupee, this will be achieved by promoting the currency for import and export, without any limits.
"India is today considered as one of the fastest growing economies of the world with clear emphasis on strong macroeconomic fundamentals and is recognised as one of the few bright spots amidst current challenges and uncertainties. Concomitantly, the financial sector has expanded both in terms of depth and diversity with differentiated niche banks catering to the differing needs of the economy and society," said Rao.
The deputy governor said that India has increasingly aimed to promote trade denominated in rupees. Last July, the RBI introduced a new mechanism to settle international trade in rupees, aiming to promote exports and facilitate imports. In his words, "There was a "good amount of interest" in the rupee trading arrangements the RBI was putting in place. And if the central bank's efforts towards rupee-invoicing bear fruit, local exporters and importers will not need to hedge."
"In a constantly evolving world where change is the only constant, the journey of the Indian foreign exchange market over the last few decades has been one of continuous development and innovation. The Reserve Bank remains committed to continuously move ahead at a steady pace in line with the changing macro-financial environment - globally and domestically," Rao further noted.
