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A Triple Attack on Rupee

2 min read

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.

  • Tags :
  • Rupee Depreciation
  • Foreign Portfolio Investors (FPIs)
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