RBI Shifts to Near-Constant Rupee Intervention as Forex Reserves Jump

The Reserve Bank of India has shifted to a more constant pattern of currency market intervention over the past month, moving away from its earlier approach of stepping in only during sharp swings, as fresh dollar inflows give it more room to defend the rupee.

According to people familiar with the matter, the change is being funded by roughly $73 billion in fresh money that has flowed in since June under RBI measures designed to attract dollar deposits. In one notable instance, the central bank reportedly sold about $7 billion in a single day across onshore and offshore markets as the rupee approached record-low levels.

A more active defense

The rupee has been Asia's worst-performing currency this quarter, squeezed by a widening current account deficit tied to elevated crude oil prices and a narrowing interest-rate gap with the United States that has pulled capital away from Indian markets. Despite that pressure, the more frequent intervention appears to be paying off in one respect: near-term volatility in the dollar-rupee exchange rate has fallen to close to a 10-month low, even as the currency itself has continued to drift lower.

Market strategists say the RBI's goal is not to reverse the rupee's broader trajectory but to smooth out the pace of its moves. The rupee has weakened close to 1% against the dollar so far this quarter, a far more measured decline than the sharper drop seen in the January-March period, when tensions in the Middle East rattled investor sentiment toward oil-importing economies like India's.

Reserves provide the cushion

India's foreign exchange reserves have climbed to roughly $674 billion, giving the central bank a substantial buffer even as more than $100 billion in future dollar-selling obligations loom on its books. Because a large share of the new inflows arrived through swap arrangements with commercial lenders, the RBI has flexibility in how it manages upcoming settlements without draining too much rupee liquidity from the banking system.

Currency strategists tracking the market note that dollar demand from importers has remained persistently strong, as businesses lock in forward purchases to hedge against further rupee weakness, while dollar-selling by exporters has lagged behind. Monthly average forward dollar purchases have risen sharply this year compared with dollar sales, according to data from the Clearing Corporation of India, underscoring the imbalance the central bank is trying to manage.

Economists caution that the RBI's approach still leaves an open question: whether even a more assertive intervention strategy, backed by record reserves, will be enough to convince investors that the rupee's current level is undervalued. The central bank has so far avoided raising interest rates to defend the currency, wary of slowing an economy that is already contending with headwinds from the broader geopolitical environment.

This article is an original editorial summary based on publicly reported information. It has been independently written for publication and does not reproduce content from any single source.