External MPC members acknowledge rupee as a factor; RBI members mum
April 23, 2026
One former central banker stood solidly behind the minutes of the RBI members.
A stand out feature of this time’s minutes of the Monetary Policy Committee (MPC) is the appearance of the external sector and the rupee as a key monitorable. Importantly, while all the three external MPC members have commented on the current and capital account deficit in varying degrees, the RBI members are silent on the external front maintaining a brahminical adherence to the flexible inflation targeting regime or the FIT.
Let's first enlist what the external members are saying. Nagesh Kumar merely notes that "the rupee has come under pressure" and that the Current Account Deficit (CAD), which had been benign so far below 1.5%, may worsen. Dr Ram Singh goes a step further. Although he argues for a dovish pause, he acknowledges "that a dovish pause is not going to help on the external front, especially when the INR has been depreciating, and the CAD data has been generating mixed signals".
Though he acknowledges that policy dovishness can have a negative impact on the rupee he doesn’t recommend action saying that India’s high dependence on crude and gold imports is a structural issue to be handled by the govt.
Saugata Bhattacharya is most direct in acknowledging that currencies do impinge on monetary policy. He says, "The capital account remains potentially vulnerable to global geo-economic developments. With rising global inflationary pressures, the space for major global central banks to further ease rates seems to have shrunk, likely inducing spill-over effects on capital flows into India”. That’s as close as one can get to acknowledging that interest rate differential with globally important currencies like the dollar, matters."
But as said before, what comes through loudest in the minutes is the silence of the RBI members on the currency issue. The question is does adherence to an FIT regime require a blotting out of the elephant in the room – the continuous and outsized pressure on the rupee? Isn't what the rupee can buy externally and internally related?
Many market participants do not divorce the two when they discuss markets. Many a dealer blames the RBI's October rate cut as a policy mis-step since the rupee had already fallen by about 4% in the April-September period and was among the worst performing currencies in Asia. The October cut may have exacerbated the capital outflows, according to some dealers as external speculators would have read this as a sign the RBI is comfortable with a falling rupee.
Former SEBI member and a former banker and FX trader, G Ananth Narayan, wrote in the Business Standard yesterday:
“Foreign investors need comfort that INR will not see a runaway underperformance. However, India cannot simultaneously sustain low interest rates, high capital inflows, and a stable INR. For now, we must look to reduce financial repression. Large RBI bond purchases and low interest rates may appear to assist credit growth. However, just as price control breeds inefficiencies, debt markets are stunted when posttax interest income returns fail to beat inflation expectations. More market-determined interest rates would help in many ways. First, interest rate differentials between USD and INR would adjust to levels that encourage currency stability….”
In short, Narayan acknowledges that lower rates and a repressed yield curve impact FX inflows due to low interest rate differentials.
The FIT regime accords primacy to inflation and advises that central banks use only one instrument for one goal: so interest rates must be used only for inflation, not to manage exchange rate. FX has to be managed by other steps like the RBI announced on March 28. But across FX traders desks interest rate is a constant input. Yields impact the FX forward rates and hence dollar inflows.
A related question is, should the MPC at least not discuss the external sector for financial stability reasons. And if they did why are the RBI members views not in the minutes. And if they didn’t, isn’t it amounting to sacrificing reality at the altar of theoretical purity.
One former central banker stood solidly behind the minutes of the RBI members. "I would rather the RBI talk about achieving its inflation mandate, and use that to allow the rupee to find its level, whatever that is," he said.
But another former central banker explained that monetary policy operates through multiple channels -including exchange rates. Making a complete separation is neither feasible nor desirable.
May be a wider debate is called for on how and how much the external sector issue should impinge in an inflation targeting regime.
Let's first enlist what the external members are saying. Nagesh Kumar merely notes that "the rupee has come under pressure" and that the Current Account Deficit (CAD), which had been benign so far below 1.5%, may worsen. Dr Ram Singh goes a step further. Although he argues for a dovish pause, he acknowledges "that a dovish pause is not going to help on the external front, especially when the INR has been depreciating, and the CAD data has been generating mixed signals".
Though he acknowledges that policy dovishness can have a negative impact on the rupee he doesn’t recommend action saying that India’s high dependence on crude and gold imports is a structural issue to be handled by the govt.
Saugata Bhattacharya is most direct in acknowledging that currencies do impinge on monetary policy. He says, "The capital account remains potentially vulnerable to global geo-economic developments. With rising global inflationary pressures, the space for major global central banks to further ease rates seems to have shrunk, likely inducing spill-over effects on capital flows into India”. That’s as close as one can get to acknowledging that interest rate differential with globally important currencies like the dollar, matters."
But as said before, what comes through loudest in the minutes is the silence of the RBI members on the currency issue. The question is does adherence to an FIT regime require a blotting out of the elephant in the room – the continuous and outsized pressure on the rupee? Isn't what the rupee can buy externally and internally related?
Many market participants do not divorce the two when they discuss markets. Many a dealer blames the RBI's October rate cut as a policy mis-step since the rupee had already fallen by about 4% in the April-September period and was among the worst performing currencies in Asia. The October cut may have exacerbated the capital outflows, according to some dealers as external speculators would have read this as a sign the RBI is comfortable with a falling rupee.
Former SEBI member and a former banker and FX trader, G Ananth Narayan, wrote in the Business Standard yesterday:
“Foreign investors need comfort that INR will not see a runaway underperformance. However, India cannot simultaneously sustain low interest rates, high capital inflows, and a stable INR. For now, we must look to reduce financial repression. Large RBI bond purchases and low interest rates may appear to assist credit growth. However, just as price control breeds inefficiencies, debt markets are stunted when posttax interest income returns fail to beat inflation expectations. More market-determined interest rates would help in many ways. First, interest rate differentials between USD and INR would adjust to levels that encourage currency stability….”
In short, Narayan acknowledges that lower rates and a repressed yield curve impact FX inflows due to low interest rate differentials.
The FIT regime accords primacy to inflation and advises that central banks use only one instrument for one goal: so interest rates must be used only for inflation, not to manage exchange rate. FX has to be managed by other steps like the RBI announced on March 28. But across FX traders desks interest rate is a constant input. Yields impact the FX forward rates and hence dollar inflows.
A related question is, should the MPC at least not discuss the external sector for financial stability reasons. And if they did why are the RBI members views not in the minutes. And if they didn’t, isn’t it amounting to sacrificing reality at the altar of theoretical purity.
One former central banker stood solidly behind the minutes of the RBI members. "I would rather the RBI talk about achieving its inflation mandate, and use that to allow the rupee to find its level, whatever that is," he said.
But another former central banker explained that monetary policy operates through multiple channels -including exchange rates. Making a complete separation is neither feasible nor desirable.
May be a wider debate is called for on how and how much the external sector issue should impinge in an inflation targeting regime.