New Delhi: The Reserve Bank of India (RBI) has sold a little more than $26 billion worth of its foreign currency reserves since end-September in a likely bid to stabilise the ongoing fall in the rupee and ensure the currency hovers around a particular benchmark, an analysis by ThePrint has found. That benchmark seems to be Rs 84 to a dollar.
However, despite the RBI’s best efforts, the rupee recently fell well below that mark in response to the strengthening of the US dollar due to Donald Trump’s win in the US presidential elections.
Central banks can intervene in the currency market by buying or selling US dollars, which is the benchmark currency, to influence the exchange rate of their local currencies. The RBI, for example, can buy dollars to prevent an appreciation in the rupee, and sell dollars to prevent a depreciation.
ThePrint has learnt that the RBI might have been doing both over the past months, first intervening to halt a rapid appreciation of the currency and more recently stepping in to slow a sharp depreciation.
The mechanism is a function of demand and supply. When the RBI buys dollars, it floods the market with rupees, which lowers the value of the rupee—or depreciates it—due to this increased supply. On the other hand, when it sells dollars, the RBI reduces the supply of rupees in the market, thereby appreciating its value.
RBI data shows that the rupee nearly touched the Rs 84 per dollar mark in September, coming in at Rs 83.97 on 10 September, a record low. It then appreciated significantly to Rs 83.49 by 20 September.
This strong appreciation in the rupee was stopped in its tracks soon after, however, with the RBI buying up dollars and increasing its foreign exchange reserves. Between 13 September and 27 September, India’s foreign currency assets jumped by $13 billion to $616.2 billion. Due to these efforts, the rupee again fell to Rs 83.67 by 27 September.
The rupee continued falling—perhaps too swiftly for RBI’s comfort—to again touch the Rs 83.97 mark by 4 October. This is where evidence again mounts of the RBI’s intervention to prevent the rupee from falling further by any significant amount.
“During October, foreign institutional investors (FII) were selling on a daily basis,” V.K. Vijayakumar, the chief investment strategist at Geojit Financial Services, told ThePrint. “A slowdown in corporate earnings growth (as has been seen in Q2 of this year) and a market rally are not compatible and so that’s why there has been aggressive selling by FIIs. And naturally, when FIIs sell and take their money out, the rupee will start depreciating.”
In other words, the rupee should have fallen consistently throughout October. Yet, this didn’t happen, and this again coincided with the RBI’s actions.
During the first 10 days of October, the rupee’s fall suddenly stabilised, with it remaining almost unchanged and below the Rs 84 mark during this period. Notably, coinciding with this period of stability, the RBI sold $14 billion from its reserves between 27 September and 11 October.
However, the pressure from the FII selling proved too great, and the rupee subsequently finally fell below the Rs 84 per dollar mark, coming in at Rs 84.06 on 11 October, a new record low.
From then till the end of October, the rupee exchange rate remained remarkably flat, ending the month at Rs 84.09 per dollar. This is likely because the RBI sold $12 billion more of its reserves during this period.
Overall, during the course of October, the RBI sold a total of $26.4 billion, which is likely why the rupee remained nearly flat throughout the month.
November has seen the rupee depreciate further, mostly due to the strengthening of the dollar—a factor not in the RBI’s control—following Donald Trump’s win of the presidential elections in the US. The rupee exchange rate stood at Rs 84.37 as of 8 November.
“Trump has gone on record saying that he would cut the corporate tax to 15 percent, which will lead to the earnings growth of companies in the US,” Vijayakumar explained. “And we know Trump is very pro-business in general. This means there will be a lot of money going into the US, from emerging markets, from China, etc. That is already strengthening the dollar.”
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IMF has called out India for forex interventions in the past
This would not be the first time that RBI’s foreign exchange reserves data and the rupee exchange rate have shown the central bank has been intervening significantly to stabilise the rupee. In fact, the International Monetary Fund (IMF) last December reclassified India’s exchange rate regime from ‘floating’ to ‘stabilised arrangement’ to indicate this heightened level of intervention.
The relative flexibility of countries’ exchange rate regimes are graded along a scale, from ‘independently floating’ on one end denoted an exchange rate that moves entirely due to market forces and ‘exchange arrangements with no separate legal tender’ on the other end to indicate a system that uses the US dollar as its own currency.
India’s exchange rate regime had been classified as ‘floating’, indicating a relative flexibility. However, the change of this classification in December by the IMF to ‘stabilised arrangement’ meant it felt the RBI was inordinately intervening in the currency market.
“Based on foreign exchange intervention (FXI) data that the RBI publishes on a monthly basis, the RBI has been using FXI to cushion the impact of external shocks, smooth market volatility, preclude emergence of disorderly market conditions (DMC), and opportunistically replenish its FX reserves,” the IMF said in its report in December 2023.
The IMF acknowledged that central banks can intervene in the foreign exchange markets to “address disorderly market conditions” but found that the RBI had possibly exceeded the normal levels of these interventions.
“However, during December 2022-October 2023, the Rupee-U.S. Dollar exchange rate moved within a very narrow range, suggesting that FXI likely exceeded levels necessary to address disorderly market conditions,” the IMF said.
The impression of inordinate control over the exchange rate is one most economies try to avoid because it indicates that the government or regulators aren’t letting market forces play out as they should.
At the time, the RBI officially protested this reclassification, arguing that its interventions had not exceeded necessary levels and that the time period that the IMF used to analyse the currency movements was too short to reach an adequate conclusion.
However, officials at the RBI have confirmed to ThePrint that the central bank does intervene in the foreign exchange market, sometimes to significant levels.
“It is the role and responsibility of the RBI to intervene to maintain the quality of the international connection we have with regard to the currency,” a senior RBI official told ThePrint on the condition of anonymity.
“This is not necessarily with a perspective to manage the value at any particular level, but certainly in terms of reducing volatility,” he added. “If there is some artificial factor that affects the rupee, then interventions are made to prevent the rupee appreciating or depreciating sharply as a result.”
The RBI does not officially comment on its forex interventions.
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