RBI Intervention and Rupee Exchange Rate
Recently Indian rupee saw its most significant gain against the US dollar in seven months due to a strategic intervention by the Reserve Bank of India (RBI).
Key Details of the Intervention
- The RBI's action involved the sale of dollars, thereby increasing the supply of dollars relative to the rupee.
- This resulted in the rupee appreciating by over 1% during the day, with a closing gain of 0.7% over the dollar.
- The exchange rate moved from 91.05 to 90.09 per dollar.
Context and Reasoning
- The rupee had depreciated by more than 6% over the past year, a rate two to three times faster than historical trends.
- A rapid decline of 3% was observed since November 15, prompting the intervention.
RBI's Approach
- RBI Governor emphasized allowing market forces to determine the rupee's value.
- The aim is to mitigate abnormal or excessive volatility without targeting specific price levels.
- There is no strict definition of "excessive" fluctuation, but the quick slide from 90 to 91 in 10 days was significant.
Considerations and Implications
- A sharp, continuous fall could lead to panic and self-fulfilling depreciation.
- With low domestic inflation and subdued crude oil prices, a depreciating rupee might not spike inflation to uncomfortable levels.
- RBI interventions can moderate fluctuations but cannot dictate the rupee's long-term value.
- The rupee's true value depends on India's trade balance and attractiveness to global capital flows.
