RBI spends $77B to stabilize Indian rupee
What's the story
The Reserve Bank of India (RBI) has spent $77 billion from its forex reserves to stabilize the Indian rupee. The intervention, conducted in the spot market, has made the rupee one of the least volatile currencies among its peers. According to RBI data, India's forex reserves fell to $623.983 billion on January 17, 2025, from $701.176 billion on October 4, 2024.
Currency fluctuation
Indian rupee's depreciation and external factors
Between October 1, 2024, and January 27, 2025, the Indian rupee fell from 83.8213 to 86.3550 against the US dollar. This marks a depreciation of about 2.97% over the past three months. A growing trade deficit, rising crude oil prices, and hints from the US Federal Reserve of fewer rate cuts in the next year have all contributed to this trend.
Market impact
RBI's intervention impacts domestic liquidity
The RBI's decision to intervene in the forex market by selling dollars has significantly affected domestic liquidity in the banking system. Normally, when the central bank intervenes this way, it sells dollars and buys rupees, essentially taking liquidity out of the banking system. This is done through banks and can put a strain on liquidity in these institutions.
Investor exodus
Foreign investors withdraw from Indian equity markets
In January 2025, FPIs withdrew ₹64,156 crore from Indian equity markets. The withdrawal was driven by several factors including the depreciation of the rupee, rising US bond yields, and expectations of a weak earnings season. High valuations of Indian equities, dismal quarterly results of companies, and global uncertainties have also made investors cautious about their investments in India's stock market.