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Volatile exchange rate unlikely to disrupt business: Reddy

The Reserve Bank said that volatile exchange rate was unlikely to disrupt business environment as the corporates and business entities in India take time to respond to changes.

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HYDERABAD: The Reserve Bank on Thursday said that volatile exchange rate was unlikely to disrupt business environment as the corporates and business entities in India take time to respond to changes.
    
"The pressure for change (among business entities) cannot be to such an extent that the volatile exchange rate movements seriously disrupt the business environment," RBI Governor Y V Reddy said, while addressing the annual conference of the Indian Econometric Society here.
    
Opening or closing a business in India takes considerable amount of time. Hence, the real sector responses to exchange rate movements are not likely to be as flexible as in the advanced economies, he said.
    
One, therefore, has to make a judgment on the extent of existence of such flexibility in the real sector, Reddy said, adding, no doubt, the policy makers have to encourage the real sector to change and become more and more flexible to cope with the exchange rate dynamics.
    
Meanwhile, Rupee against dollar has appreciated over 15 per cent since October 2006, leading to slowdown in the export growth.
   
Reddy said, the emerging challenges to capital account management, both in the short and over the medium-term have been recognised by the policy makers at all levels.
    
"I believe that it will be prudent not to exclude the possibility of some change in course, due to any abrupt changes in sentiments or global liquidity conditions, despite strong underlying fundamentals of the Indian economy," he said.
    
Reddy said, strategic management of capital account would warrant preparedness for all situations and the challenges for managing the capital account in such unexpected turn of events would normally be quite different.
    
So, the apex bank considers it prudent to continue to analyse and monitor different scenarios and possible contingencies so that capital account and monetary management continue to facilitate high growth, while maintaining price and financial stability, he added.
    
According to mid-year review released on December 7, the predominant issue that continues to confront the monetary authority during the current year has been the steady increase of forex flows and the policy response thereto.

 

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