Contrary to popular belief, a sliding rupee may not strengthen Indian exports, Reserve Bank of India governor Duruvvi Subbarao said in Hyderabadhere on Friday.
Nevertheless, the central bank is not targeting exchange rates, but will intervene in the foreign exchange markets only to curb volatility and prevent disruption of macroeconomic stability, he said at a function organised by the Institute of Public Enterprise.
''It is somewhat misleading to believe that we can get export competitiveness from our exchange rate. We need to get this by increasing our productivity and competitiveness in other ways and not by exchange rate,'' Subbarao said.
He said a widening current account deficit (CAD) will put further pressure on the rupee. The RBI's sustainable CAD level is between 2.5 and 3 per cent of the GDP. The CAD widened to a record 6.7 per cent of the GDP during the October-December quarter of 2012.
Subbarao's observations come at a time when the local currency has hit a new low of Rs57.12 against the dollar, coming close to the all-time low of Rs57.33 on 22 June 2012.
The rupee has fallen nearly 6 per cent against the dollar since May due to a strengthening of dollar and rising oil and gold imports.
''In India, the RBI does not target any exchange rate. We intervene in the foreign exchange market only to manage the volatility and to manage the disruption to the macro-economic situation,'' he said.
''The important point is that we have to be internally sure that when we enter market we are credible because for a central bank failed defence of exchange rate can be quite detrimental,'' he added.
''When you have downward pressure on the rupee, as I said you have to shell your dollars. And a fair defence of the exchange rate can be worse than no defence.''
According to Y V Reddy, former RBI governor and the chairman of the 14th Finance Commission, a zero CAD should be the mantra of macro management over the medium term.