RBI spent $6bn in May to halt rupee's record slide
The Reserve Bank of India offloaded a net $6 billion in May to stem a record currency decline, a strategy that has successfully drawn foreign capital back into the country's equity and bond markets.
The Reserve Bank of India sold a net $6 billion in May to defend the rupee after the currency plummeted to a record low of 96.96 against the US dollar. According to the central bank's monthly bulletin, officials purchased $22.2 billion but offloaded $28.3 billion during the month. This heavy intervention followed net sales of $8.9 billion in April, demonstrating a sustained effort to manage exchange rate volatility.
The currency's sharp decline was primarily driven by surging global oil prices and elevated international bond yields, which typically pressure emerging market assets. To stabilize the exchange rate, the central bank combined direct market intervention with a targeted series of policy measures designed to attract dollar inflows. Those steps included tax cuts on foreign debt investments and newly introduced incentives for domestic banks to raise overseas foreign exchange deposits.
The RBI's aggressive market stance is further reflected in its derivatives book. Net outstanding forward dollar sales surged to a record $106.6 billion by the end of May, a significant increase from $95.3 billion at the end of April. This build-up of forward liabilities highlights the extent of the central bank's commitment to supporting the local unit.
For investors, the intervention strategy appears to have successfully altered market dynamics. After months of heavy foreign selling in Indian equities that lasted through early June, sentiment shifted. Foreign inflows into the sovereign bond market rose in June and have remained positive through July. Equity markets have also seen foreign capital return this month.
The central bank noted in its bulletin that the recovery in foreign investment flows signals a "revival of confidence in the economy." Officials also highlighted that India's foreign exchange reserves remain at comfortable levels, providing sufficient cover for 10 months of imports. This buffer acts as a critical safeguard against future external shocks.
Despite the stabilizing currency and returning capital, the broader economy still faces structural headwinds from elevated global oil prices and a weak domestic monsoon. While food prices have increased due to weather concerns, core inflation remains contained. The RBI pointed out that although uneven rains have delayed crop sowing, "high public foodgrain stocks should provide some cushion against price pressure."
