Managing FX rate involves a cost: Subbarao

Reserve Bank of India governor Duvvuri Subbarao today said that managing the foreign exchange rate in the face of volatile flows contains a cost, and in such a situation, RBI feels that challenge is to minimize cost.

Subbarao said "At the national level we have to manage the impossible trinity. Managing exchange rate in the face of volatile flows entails a cost no matter what you do. The challenge is really to minimise the cost".

He also added, "It is unrealistic to expect only the emerging market economies to lift global growth."

As talk of currency battles rumble through the global economy, India has been a reluctant warrior. The Indian rupee has witnessed surge of up 9 per cent against the dollar in the last 16 months. However, it has gained 5.6% since early September due to sustained capital inflows, thus forcing the central bank to intervene in the forex market for the first time this fiscal year.

This in turn has affected the exports badly like the textiles by making them more expensive on the world market. And the strong rupee poses longer-term threats of overheating the economy.

Meanwhile, the government ruled out curbs on foreign portfolio investment into the equity market, but said that the central bank may intervene in the forex market in order to check rupee appreciation.

"At this time, I am not thinking of putting any cap on FII (foreign institutional investment) inflows," finance minister Pranab Mukherjee said at the annual economic editors conference.

However, Mr Mukherjee acknowledged that the exports is taking a hit due to the costly rupee, but said RBI will take action if needed.