The RBI sold $26 billion worth of reserves in a month to halt the rupee’s depreciation, but the Trump effect eventually won

New Delhi: The Reserve Bank of India (RBI) has sold just over $26 billion worth of foreign exchange reserves since late September in a likely attempt to stabilize the rupee’s ongoing decline and keep the currency hovering around a certain benchmark, as shown by an analysis by ThePrint. That benchmark appears to be Rs 84 per dollar.

However, despite the RBI’s efforts, the rupee recently fell well below that level in response to the strengthening of the US dollar following Donald Trump’s victory in the US presidential election.

ThePrint has learned that the RBI may have done both in recent months, first intervening to halt a rapid appreciation of the currency and recently intervening to slow a sharp depreciation.

The mechanism is a function of supply and demand. When the RBI buys dollars, it floods the market with rupees, causing the value of the rupee to fall (or depreciate) due to this increased supply. On the other hand, when the RBI sells dollars, it reduces the supply of rupees in the market, increasing its value.

RBI data shows that the rupee almost touched the Rs 84 per dollar mark in September and stood at Rs 83.97 on September 10, a record low. It then rose significantly to Rs 83.49 on September 20.

However, this strong appreciation of the rupee was halted shortly afterwards when the RBI bought dollars and increased its foreign exchange reserves. Between September 13 and September 27, Indian currency assets rose by $13 billion to $616.2 billion. Thanks to these efforts, the rupee fell again to Rs 83.67 on September 27.

The rupee continued to fall – perhaps too quickly for the RBI’s comfort – to touch the Rs 83.97 mark again on October 4. This is where evidence mounts again of the RBI’s intervention to prevent the rupee from falling further by a significant amount.

“In October, foreign institutional investors (FII) sold on a daily basis,” VK Vijayakumar, chief investment strategist at Geojit Financial Services, told ThePrint. “A slowdown in corporate profit growth (as we saw in the second quarter of this year) and a market rally do not go together and that is why there has been aggressive selling by financial institutions. And of course, the rupee will start depreciating as FIIs sell and take their money out.”

In other words, the rupee should have fallen consistently in October. Yet this did not happen, and this again coincided with the actions of the RBI.

During the first ten days of October, the rupee’s decline suddenly stabilized, while remaining virtually unchanged and below Rs 84 during this period. Notably, coinciding with this period of stability, the RBI sold $14 billion from its reserves between September 27 and October 11.

However, the pressure from FII selling proved too much and the rupee subsequently fell below Rs 84 per dollar to settle at Rs 84.06 on October 11, a new record low.

From then until 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.

In total, the RBI sold a total of $26.4 billion during October, which is probably why the rupee remained virtually stable throughout the month.

The rupee depreciated further in November, mainly due to the strengthening of the dollar – a factor outside the RBI’s control – following Donald Trump’s victory in the US presidential elections. The rupee exchange rate stood at Rs 84.37 on November 8.

“Trump has officially said that he would cut corporate taxes to 15 percent, which will lead to profit growth for companies in the US,” Vijayakumar explains. “And we know that Trump is very pro-business in general. This means that a lot of money will flow into the US, from emerging markets, from China, etc. That already strengthens the dollar.”

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The IMF has called on India to implement currency interventions in the past

This would not be the first time that the RBI’s foreign exchange reserves data and the rupee exchange rate show that the central bank has intervened significantly to stabilize the rupee. In fact, the International Monetary Fund (IMF) last December reclassified the Indian exchange rate regime from ‘floating’ to ‘stabilized arrangement’ to indicate this increased level of intervention.

The relative flexibility of countries’ exchange rate regimes is classified on a scale, from ‘independently floating’ on the one hand, which indicates an exchange rate that moves entirely in response to market forces, and ‘exchange arrangements without a separate legal tender’ on the other, to indicate a system that uses the US dollar as its own currency.

India’s exchange rate regime was classified as ‘floating’, indicating relative flexibility. However, the IMF’s change of this classification to a ‘stabilized arrangement’ in December meant it believed the RBI was intervening excessively in the foreign exchange market.

“Based on the currency intervention data (FXI) that the RBI publishes monthly, the RBI has used FXI to cushion the impact of external shocks, mitigate market volatility, prevent the emergence of disorderly market conditions (DMC) and opportunistically stabilize the currency to supplement. its foreign exchange reserves,” the IMF said in its December 2023 report.

The IMF acknowledged that central banks can intervene in foreign exchange markets to “address disordered market conditions,” but concluded that the RBI may have exceeded normal levels of these interventions.

“However, during the period December 2022 to October 2023, the rupee-to-US dollar exchange rate moved within a very narrow range, indicating that FXI likely exceeded the levels necessary to address the disorderly market conditions” , the IMF said.

The impression of excessive control over the exchange rate is something that most economies try to avoid, because it indicates that the government or regulators are not allowing market forces to 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 used by the IMF to analyze currency movements was too short to reach an adequate conclusion.

However, RBI officials confirmed to ThePrint that the central bank does intervene in the foreign exchange market, sometimes at significant levels.

“It is the role and responsibility of the RBI to intervene to maintain the quality of international connectivity that we have regarding the currency,” a senior RBI official told ThePrint on condition of anonymity.

“This is not necessarily with the perspective of managing value at a certain level, but certainly in terms of reducing volatility,” he added. “If there is any artificial factor affecting the rupee, interventions are taken to prevent the rupee from rising or falling sharply as a result.”

The RBI does not officially comment on its forex interventions.

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