RBI will intervene in forex market to prevent instability
RBI has said that it doesn’t target any exchange rate but it will intervene in the Forex market to only to curb volatility and prevent disruption of macroeconomic stability. The statement has come amid weakening of Rupee as it declines to 57 mark against US dollar.
Why does RBI intervene in the Forex market?
With the decline of the Indian currency against dollars, the imports (mainly petroleum, raw materials) become costly as we have to buy dollars by shelling out more rupees. These dollars are then used to pay for our imports because it is acceptable everywhere. Thus, as we pay higher prices for our imports of petroleum, it affects the prices of other commodities linked with petrol/diesel through increased cost of production or transportation which adds to inflation. In order to prevent inflation due to Forex market volatility, it becomes imperative for the central bank to take mitigate measure to manage the disruption to the macro economic situation.
What can RBI do?
- RBI can opt for releasing dollars into the market which will help curb sentiment and panic purchase.