RBI Uses Half of $140 Billion Forex Capital to Support Rupee

India's Reserve Bank has utilized close to 50 percent of the $140 billion foreign exchange reserves it secured earlier this year to defend the Indian rupee amid significant market challenges. This substantial intervention underscores the central bank's efforts to maintain currency stability and mitigate inflation and financial risks.

According to economists and foreign exchange traders from six major banks, the Reserve Bank of India (RBI) has been actively selling dollars in the spot market and conducting dollar-rupee swap operations. These measures are designed not only to support the local currency but also to manage surplus rupee liquidity circulating within the banking system.

The rupee has come under pressure due to several factors. Persistently high oil prices have increased import costs, while a recent rise in US Treasury yields has attracted foreign investors away from Indian assets. Additionally, sustained foreign equity outflows have further weakened the local currency. These combined pressures have compelled the RBI to intensify its market interventions.

Experts estimate that since June 8, when the RBI implemented its special measures to boost foreign currency inflows, the central bank has deployed approximately $75 billion to $80 billion through spot dollar sales and swap agreements. This assessment is based on adjustments to weekly foreign exchange reserve data the RBI publishes every Friday, removing distortions from asset revaluations.

India’s foreign exchange reserves fell to $734.6 billion as of October 2, marking a decline of around $51 billion from a peak reached in early September. Ambit analysts noted that the reduction in usable reserves, after accounting for forward contracts and gold holdings, has become substantial. They cautioned that if this downward trend continues, it could raise concerns about the RBI’s capacity to defend the rupee and potentially lead to increased speculative trading against the currency.

At the end of September, the RBI’s net forward dollar liabilities were approximately $200 billion, with gold reserves valued at $106.4 billion as of October 2. These figures help provide context for the scale of intervention and the resources available to the central bank as it navigates currency market volatility.

Interviews with banking traders indicate they concur with economists’ estimates regarding the intervention’s magnitude. These insights derive from discussions with foreign exchange brokers and proprietary market models that incorporate various trading parameters.

The RBI has not issued an official comment on these estimates.

In an effort to reduce dollar demand directly, the RBI recently launched new initiatives. It set up a special window allowing oil companies to purchase dollars from the central bank itself rather than through open market channels. This move is intended to divert some dollar demand away from the broader market.

Additionally, the RBI imposed cash margin requirements on certain forward dollar contracts, increasing the cost for importers hedging their currency exposure. By raising these costs, the central bank aims to discourage excessive dollar buying, which could further weaken the rupee.

Market observers note that over the past six months, the RBI consistently intervened when the rupee approached a threshold of 97 per US dollar. This pattern suggests that the central bank views this level as a critical tolerance point for maintaining currency stability.

India’s currency management efforts occur in a global context where many emerging markets confront similar pressures from capital outflows, commodity price shocks, and shifting monetary policies in advanced economies. The RBI’s proactive stance highlights the challenges faced by central banks in balancing exchange rate stability with domestic economic priorities.