RBI Shifts to Steadier Rupee Intervention Backed by Fresh Dollar Inflows
The Reserve Bank of India has adopted a more continuous approach to defending the rupee, leveraging recent capital inflows to stabilize Asia’s worst-performing currency amid mounting macroeconomic pressures.
The Reserve Bank of India has shifted to a more consistent pattern of market intervention to support the rupee over the past month. This marks a departure from its previous strategy of only stepping in to curb extreme volatility. The change is backed by $73 billion in fresh capital attracted through central bank measures since June.
Demonstrating this active posture, the central bank deployed $7 billion in a single day across onshore and offshore markets as the currency neared a record low. This robust effort has successfully anchored near-term volatility close to a 10-month low. However, it has only slowed the rupee’s depreciation rather than reversing its downward trajectory.
The currency has weakened 0.8 percent against the dollar this quarter. While this is a marked improvement from the 5.2 percent decline seen in the first quarter amid Middle East conflict shocks, fresh headwinds are emerging. Rising crude prices are widening the current account deficit, and a narrowing interest rate differential with the United States is drawing capital out of Indian markets.
Market participants note that structural imbalances remain unresolved. Ashhish Vaidya, head of treasury at DBS Bank Ltd. in Mumbai, pointed to persistent pressure from trade flows. “What needs to be tackled is the relentless stream of dollar demand from importers and a lack of dollar selling from exporters,” Vaidya said. “You need higher forward premia, driven by higher interest rates to correct that situation.”
Balancing Growth and Defense
This highlights the delicate balancing act facing the central bank. Unlike several regional peers, the RBI has resisted raising interest rates, fearing that tighter monetary policy would stifle economic growth already facing headwinds from the Iran war. Consequently, policymakers must rely on reserves and market operations rather than yield adjustments to defend the currency.
Looking ahead, the central bank must navigate more than $100 billion in future dollar-selling obligations. The recent influx of foreign deposits provides a crucial buffer. It allows the RBI to let near-term short-dollar forward positions mature without severely draining banking system liquidity, as lenders swap the received dollars for rupees via a concessional facility.
Despite these buffers, market confidence remains fragile. More than $700 billion in existing reserves has not been enough to convince investors that the rupee is undervalued. Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership, warned that decisive action is necessary. “It’s important the RBI draws a line in the sand for rupee in the near term, as there is risk further fall in rupee could become self-fulfilling,” he said.
