The Reserve Bank of India is concerned about volatility in the rupee's exchange rate, RBI Deputy Governor Rakesh Mohan said on Wednesday.
"We have to take concern about exchange rate instability. Volatility or instability is bad at least from Reserve Bank of India point of view," Mohan said at a banking seminar.
"Now why we are concerned about volatility is because it can have contagion effects... therefore we have to take concern about volatility in the exchange rate market."
Speaking generally about the central bank's overall currency management policy he said: "We intervene to provide stability in the forex market." Earlier said the exchange rate was market determined. The rupee hit its lowest level in nine and a half months on Wednesday, around Rs 44.34 per dollar.
The International Monetary Fund is no longer large enough to take care of crisis like the one that engulfed the east Asian economies in the 1990s, said Mohan.
There is no one to take care in a crisis time as economies have grown beyond the means of the "stabiliser". The speed of capital flows is much higher now and the emergence of financial conglomerates has raised levels of concern at the central bank about financial stability, Mohan said at the seminar organised jointly by FICCI and IBA.
A bankruptcy of a financial entity or a rise and fall in asset prices not leading to financial instability is not of much concern for regulators. A correction or fluctuation in financial markets is good for financial stability.
"Our quest for financial stability doesn't mean no fluctuation. We are concerned when issues are related to contagion and systemic risk," he said.
Apart from price stability, financial stability is now being made the mandate of the central banks. A new legislation recently included financial stability as one of the mandates of the Bank of England.
With the sophistication of financial markets, the RBI set up a financial markets department to do surveillance of foreign exchange, money and other markets.
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