The Reserve Bank of India (RBI) cannot achieve price stability without financial stability, Governor Sanjay Malhotra has said, as the central bank steps up measures to curb speculation and ease pressure on the rupee.
In an interview with Moneycontrol, Malhotra said monetary policy remains primarily focused on controlling inflation, while targeted regulatory, supervisory and macroprudential measures are used to address risks to financial stability.
However, the two objectives cannot be viewed in isolation, as a stable financial system is essential for monetary policy to work effectively.
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“The mandate of price stability cannot be achieved without financial stability, as a stable financial system is essential for the effective transmission of monetary policy,” Malhotra said. Malhotra's remarks come amid questions over whether the Monetary Policy Committee (MPC) could use interest rates to support the rupee, which has faced sustained pressure in the foreign exchange market.
The governor reiterated that monetary policy decisions are guided primarily by the objective of price stability. Under the separation principle, interest rates are generally used to manage inflation, while specific regulatory measures address financial-market risks.
However, the RBI does not rule out the connection between the two, given that monetary policy decisions can also influence financial stability.
“The RBI is determined to do whatever is necessary to ensure orderly movement in the forex market,” Malhotra said.
Explaining the rationale behind the recent restrictions, he said the central bank had observed excessive speculative positioning on the buy side of the foreign exchange market.
“The purpose of these measures is primarily to ensure an orderly movement in the forex market. The measures taken; for example, disallowing the rebooking of cancelled forex derivatives contracts; will also check undue speculative bets. We have brought in a forex reserve requirement because we observed excessive speculative positioning on the buy side,” he said.
The RBI has introduced a series of measures to ease pressure on the rupee, including a dedicated dollar window for state-run oil marketing companies and tighter restrictions on foreign exchange derivatives. The measures aim to reduce immediate dollar demand in the spot market and discourage speculative positions.
In a late-evening notification on Monday, the central bank also restricted non-deliverable rupee derivatives contracts offered to non-residents to hedging purposes only.
The steps appear to have supported a recovery in the currency. On Tuesday, the rupee gained 0.5%, emerging as Asia's best-performing currency and touching a one-month high.
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The Indian currency settled at 95.28 per dollar, compared with its previous close of 95.78, extending its gains over three consecutive trading sessions to 1.6%.The MPC raised the policy repo rate by 25 basis points to 5.5% on October 7.
Malhotra's comments suggest that while the RBI's primary monetary policy focus remains inflation control, it is prepared to use targeted regulatory measures to contain excessive speculation and maintain orderly conditions in the foreign exchange market.
The broader message is that currency-market stability and inflation management are interconnected, even if the central bank relies on different instruments to address each challenge.
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