I enjoyed reading this speech from the now former head of the RBI, it does give a quick insight into the thinkings of a central banker.
To bolster the value of the rupee, we had to give investors more certainty that future inflation would be low. After all, it was primarily India’s higher inflation with respect to the rest of the world that led to periodic abrupt falls in rupee value. Then Deputy Governor and now my successor, Dr. Urjit Patel, agreed to prepare a report on how we could move to a new inflation-focused monetary regime. That would help very much in the medium term, but in the short run we had to establish that we were not heading towards crisis. The easiest way to demonstrate that was to show we could raise plenty of foreign exchange.
This mission, however, exposes the central bank to criticism. If we try and bring down inflation, interest rates will remain higher than borrowers desire. If inflation comes down, the currency will depreciate less than some exporters desire. If we push the banks to clean up, banks may be less tolerant towards habitual non-payers. Whatever we do, someone will object. The RBI then becomes the favorite scapegoat for underperformance – if exports are not picking up, it is because interest rates are too high and because the exchange rate is too strong.