Context:
From the beginning of sharp depreciation in December 2024 and January 2025, the rupee began stabilizing after repo rate cut by RBI on February 7. After 85 to 87 rupees a dollar in a month it took 478 days to go from 84 to 85. FPIs withdrew ₹2 trillion from Indian equities after Donald Trump was re elected and his administration began to implement protectionist policies that put more pressure on the rupee.
RBI Interventions to Support the Rupee
- With speculation that the rupee would breach 88 due to an anticipated rate cut, the RBI intervened aggressively to avoid further slipping.
- February 10-11 saw state run banks sell approximately $12 billion on behalf of the RBI, actually bringing the rupee back down below 87.
- The rupee firmed to 86.50 on February 14, showing its largest weekly gain in 19 months.
- The traders have become reluctant to bet against the rupee, which helped reduce volatility.
Liquidity Problems & The RBI Response
- Depending on RBI’s dollar sales, rupee liquidity is squeezed and will affect money market conditions.
- In January, liquidity shortages were more than ₹3 trillion, prompting RBI to inject liquidity to manage the market:
- By open market operations (OMO), the RBI injected ₹60,000 crore in three instalments.
- By auction of the variable rate repo prolonged for 56 days, the RBI injected ₹50,000 crore.
- A six month forex swap of $5 billion.
- Subsequently, doubled the last two OMO tranches to alleviate some liquidity stress.
Risks That May Arise in the Future and Future Projections
- Key Concerns
- Persistent equity outflows could pose a threat to the current account deficit of India.
- A depreciating yuan would act as an extra cushion for the rupee.
- The RBI’s forward book deficit has risen to $80-85 billion, reducing the possible scope for future intervention.
- Market Projections
- Barclays sees the rupee at 87.5 by end March.
- IFA Global expects of fluctuating rupee trade between 86.00 and 87.50 in the forthcoming months.
- According to RBI
- The likely game plan would be to manage liquidity using OMOs and forex swaps and not draw down reserves.
While the RBI’s intervention has stabilized the rupee, threats exist due to any persistent equity outflows and currency movements worldwide. Stability in the future will largely depend on RBI liquidity management, trends in foreign investment, and market conditions.
