Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday said that the "excessively strong rupee" is undesirable as it triggers disinflationary pressures.
"The rupee has remained strong relative to peer countries. While an excessively strong rupee is undesirable, it too creates disinflationary impulses," Rajan said in a statement announcing cut in interest rate.
"It bears repeating here that the Reserve Bank does not target a level for the exchange rate, nor does it have an overall target for foreign exchange reserves. It does intervene on occasion, in both directions, to reduce avoidable volatility in the exchange rate," he said.
"Any reserve build-up is a residual consequence of such actions rather than a direct objective," he added.
Rupee has surged nearly 2 per cent this year, much more than compared to various Asian currencies.
RBI has been intervening in the market at certain occasions to prevent the rupee from strengthening.
Continuing its slide for the third straight session, the rupee on Tuesday fell by 5 paise to end at 61.92 against the dollar following sustained demand for the American currency from importers and a better dollar in overseas trades.
India's foreign exchange reserves rose to $328.7 billion at the end of January 2015. Thus, it provides an "opportune time" to remove restrictions on gold imports.
The Economic Survey for 2014-15 said financial inflows in excess of the requirements have helped shore up foreign exchange reserves ($328.7 billion at the end of January 2015). They have helped lessen the vulnerability concern that led to serious stress last year.