Amid calls for a weaker rupee, RBI's Raghuram Rajan says many in government want otherwise

MUMBAI: RBI Governor Raghuram Rajan on Tuesday pushed back at demands for a weaker rupee from the government and stuck to his stance that markets are best placed to find a level for the currency. In a gentle but firm reiteration of RBI’s oft-stated policy, Rajan said the central bank’s interventions are only aimed at curbing volatility and not at defending a particular level for the rupee.

Commerce & Industry Minister Nirmala Sitharaman and Chief Economic Advisor Arvind Subramanian have called for a weak currency in recent days, and Rajan’s comments appear to go against the government’s objectives.

“I’ll always look for a weaker rupee because I am sitting here (commerce ministry) and it will help exports,” she told ET in an interview. Subramanian argued for a competitive exchange rate last week, pointing to China’s manufacturing growth and its mountain of reserves. “There is a lesson which we tend to forget. How did China accumulate $4 trillion reserves? They did it by keeping the currency competitive. Other East Asian nations have done that too. There is a lesson for all of us in terms (of) exporting success.”



Rajan sought to play down differences between RBI and the government on the issue by pointing out that there are others in the government who think differently from the commerce minister and the chief economic advisor.


“There are all kinds of people in the government. Some who want rupee to be weak, and some who want rupee to be strong,” said Rajan. “You may want a particular level of rupee. But what it takes to achieve that is also another question. We believe, broadly, markets find the rate.”

Differences common

Differences between central bank governors and governments are common in many developed and developing countries. Such differences are also bound to occur in cases where the central bank, like RBI, has a functioning autonomy and an independent mind on various policy issues.

But developments in recent months seem to indicate that the gulf between RBI and the government is widening, at least when it comes to certain issues. First, the government scrapped plans to include an independent public debt management agency (PDMA) in this year’s Budget after RBI objected to the way it was being pushed through.

The central bank, including Rajan, has long supported an independent PDMA, but the government’s proposal contained little information on how issues such as the widespread mandatory buying of government bonds by banks — called the statutory liquidity ratio — would be handled. There was also the issue of how state government borrowing, which often piggybacked on central borrowing, will be handled.

The government also had to beat a hasty retreat on plans to transfer regulation of the government bond market from RBI to the Securities & Exchange Board of India, the stock market watchdog.

Central bankers are known for their reserve and ability to speak in elliptical sentences. On Tuesday, Rajan was forthright, candid and some times a little combative. “What is important, and this is something where there is complete agreement with the finance minister and me, is that what is functioning well doesn’t need to be disrupted for some hypothetical gains,” he said in a veiled reference to the bond market fiasco.

The media came in for some stick as well. “If I cut interest rates it’s because I want to please the government. If I don’t cut the rates, it’s because I want to have a fight with the government. You all make up your mind about it,” he said, replying to questions about his relations with the finance ministry.