In order to curb volatility in domestic currency, the Finance Ministry wants the Reserve Bank of India (RBI) to intervene more frequently in the currency market to smoothen volatility. As per the Finance Ministry, the central bank should build reserves when the rupee strengthens and use this to bolster the currency when it depreciates.
Finance Ministry added that intervention at appropriate time also keeps speculators in check citing the example that in early 2008 when the rupee had strengthened to below 40 to the dollar, it could have been appropriate for the RBI to intervene at that time to buy the US currency to curb the appreciation. On the other hand, the central bank is still reluctant to use its reserves of nearly $300 billion to defend the currency when it depreciates, given that most of the amount is borrowed money.
During 2013, Indian rupee depreciated over 20 percent against the dollar mainly due to high capital outflows amid concerns over the US Fed tapering programme and high CAD. The depreciation in rupee value leads to imports becoming costlier which is a concern for India as it is structurally an import intensive country.
Meanwhile, the RBI has taken some aggressive stance in currency management, sending clear signal that it would act against any speculation. The RBI bought dollars worth of $375 million against the $2.3 billion sold in January’2014, making it a net seller of the US currency after remaining a net buyer of dollars for three months in a row earlier.