India's central bank can deploy interest rates to address financial-stability risks if needed, said Governor Sanjay Malhotra, who noted the policy is primarily for price stability but "could be used for financial stability in some circumstances."
The rupee, one of Asia's worst performers this year due to higher oil prices and foreign investor outflows, weakened to 94.94 per dollar. The RBI recently deployed aggressive measures including a special dollar window for oil companies and a cash-parking tool for forex transactions, following record inflows from a diaspora deposit program.
Malhotra emphasized the RBI does not target any specific rupee level but aims for orderly forex market conditions, citing past actions against speculative behavior. The benchmark rate was raised to 5.5% — its first hike in nearly four years — with economists projecting potential increases to 6.25% next year.
Headline inflation stood at 5.54% in September, driven by food and fuel prices, prompting the central bank to stress "stricter vigilance" against second-round effects. The RBI targets 4% inflation with a 2%-6% tolerance band.
"Inflation is elevated," Malhotra said, "but still, it's not out of the tolerance band." Analysts expect the rupee pressure to persist unless inflation eases or growth strengthens, with Bank of America forecasting a drop to 98 per dollar by year-end.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing