Mumbai: The Reserve Bank of India’s (RBI) gross currency market interventions until August in FY25 have registered a sharp increase from a year ago, reflecting the central bank’s efforts to mitigate volatility in the exchange rate in a turbulent global economic environment.
Latest data published by the RBI showed that in April and May, the central bank purchased dollars worth $8 billion and $23.6 billion, respectively, in the currency market, while making sales worth $11.7 billion and $19.4 billion.
In June and July, the RBI bought $15.9 billion and $23.6 billion, while selling $18 billion and $16.6 billion, respectively. The purchase in August was at $16.14 billion while the sales were at $22.6 billion. The data showed the RBI’s activity in the onshore and offshore currency markets. On a monthly basis, the interventions are far higher than that carried out by the RBI the same time last year.
“The gross dollar transaction shows a pick-up in activity on both gross dollar sales and gross dollar purchase in FYTD25 (April to August), which reflects two-way intervention by the RBI to minimize USD/INR volatility. The pick-up in intervention is led by the Balance of Payments surplus remaining low in H1FY25,” said Gaura Sengupta, chief economist, IDFC First Bank.
Stability & Predictability
The central bank’s stated position is that it intervenes in the currency market to prevent excessive volatility in the exchange rate. Sengupta pointed to the rupee’s low 30-day standard deviation as a gauge for the stability of the local monetary unit, despite a significant pick-up in global market volatility due to a recent escalation of tensions in West Asia, uncertainty over the outcome of the US elections and a reduction of rate cut expectations by the Federal Reserve.These factors, along with concerns of overvaluation of Indian stocks amid efforts by China to boost its economy, have prompted foreign investors to pull out a record $9.6 billion from local equities this month.
Pressured by the foreign outflows, the rupee has marked new lows versus the US dollar, weakening past the 84/$1 level for the first time earlier this month. So far in 2024, however, the local currency has depreciated 1% versus the US dollar.
“The objective is pretty clear, which the governor has emphasised again and again – that the RBI wants to use the built-up FX reserves to smoothen out volatility. That’s the main driving factor. The FPI outflows have been large this time,” said Anubhuti Sahay, head, India, economic research, Standard Chartered Bank.
