RBI's USD 77 Bn War-Chest To Stabilize Rupee May Suck Liquidity

(MENAFN- KNN India) New Delhi, Jan 27 (KNN) The Reserve Bank of India has executed substantial market interventions, utilising USD 77 billion from its foreign exchange reserves to maintain the stability of the Indian rupee.

This strategic intervention has proven effective, positioning the rupee as one of the least volatile currencies among its international peers.

Official RBI data indicates a significant decline in India's foreign exchange reserves, which fell from USD 701.176 billion on October 4, 2024, to USD 623.983 billion as of January 17, 2024.

During this period, the rupee experienced moderate depreciation, moving from 83.8213 to 86.3550 against the US dollar, representing an approximate decline of 2.97 percent over the three-month period.

Multiple factors have contributed to the rupee's recent depreciation trajectory, including an expanding trade deficit, elevated crude oil prices, and the US Federal Reserve's indication of fewer rate cuts in 2025.

Additional pressure has stemmed from India's subdued economic growth in Q2FY25 and the outflow of foreign investment from equity markets.

The situation has been further complicated by rising Brent crude oil prices, leading to the currency reaching successive record lows against the US dollar.

Despite these challenges, Bloomberg data reveals that the Indian rupee has maintained remarkable stability relative to its Asian counterparts.

It ranks as the third least volatile currency in the region, following only the Hong Kong Dollar and Taiwanese dollar, which experienced depreciation of 0.25 percent and 2.57 percent respectively between October and January.

The RBI's December 2024 report acknowledged that strengthening US dollar conditions had created depreciation pressure across emerging market currencies, resulting in a 0.7 percent month-on-month decline in the rupee's value.

The central bank's intervention strategy, while effective in stabilising the currency, has had notable implications for domestic banking liquidity.

The mechanism of selling dollars and purchasing rupees in the forex market has resulted in a reduction of liquidity within the banking system. This intervention, executed through banking channels, has contributed to tighter liquidity conditions in the domestic financial sector.

(KNN Bureau)

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