Impact of Foreign Institutional Investors' Selloff
A significant selloff by foreign institutional investors since October 2024 increased the demand for dollars in the financial markets, putting pressure on the rupee. As a result, the Reserve Bank of India's (RBI) measures to support the local currency impacted its forex reserves.
Rupee Depreciation
- The rupee closed at 87.50/$1 on February 28, from 83.81/$1 on October 1.
- This marks over a 4% depreciation in four months.
Forex Reserves Depletion
- Forex reserves peaked at $704 billion in the week ended September 27, 2024.
- They decreased to $640 billion by February 21, indicating a 9% drop in four months.
RBI's Actions and Market Intervention
- In early February, RBI net sold $111.2 billion in intervention in the spot and forward market.
- RBI was the largest seller of reserves in January among Asian central banks.
- The intervention led to a liquidity drain from the banking system, which has been in deficit since mid-December 2024.
Measures to Support Liquidity
- 50 basis points cut in the Cash Reserve Ratio (CRR) to 4% in December MPC policy.
- Long tenured variable rate repo auctions.
- Dollar-rupee buy-sell swap.
Challenges Faced by RBI
According to IDFC First Bank, the RBI is encountering the full force of the impossible trinity — maintaining a fixed exchange rate, allowing free capital movement, and sustaining an independent monetary policy.