RBI Steps In to Manage Rupee Volatility as Currency Hits Record Low

The Reserve Bank of India (RBI) has ramped up its intervention in the forex market to stabilize the rupee, which recently hit a record low of ₹84.3950 against the US dollar. This intervention, aimed at curbing excessive volatility, came as the domestic currency faced heightened pressure from a surge in dollar strength and rising US bond yields.

Context and Volatility

The rupee’s weakening trajectory, exacerbated by global events such as Donald Trump’s victory in the U.S. elections, saw it touch a historic low of ₹84.38 earlier in the week. This decline was attributed to an unprecedented surge in the dollar index and robust US Treasury yields, which triggered capital outflows from emerging markets, including India.

Traders indicated that the RBI’s timely and strong intervention in the forex market prevented the rupee from plunging further. “The central bank’s actions provided much-needed support to the currency, averting a steeper fall,” market participants observed.

Rupee Settles Post-Intervention

On Thursday, the rupee settled at ₹84.3950, slightly recovering from its record low, signaling the effectiveness of the RBI’s interventions. By managing both sides of the forex market—buying and selling foreign currencies—the RBI aimed to ensure that the rupee’s movement remains aligned with fundamentals rather than speculative pressures.

Impact on Forex Reserves

India’s forex reserves, which also include the country’s reserve tranche position with the International Monetary Fund (IMF), reflect the RBI’s ongoing efforts to stabilize the currency. The central bank’s interventions typically involve selling dollars from its reserves to supply liquidity and meet demand for foreign exchange, particularly during periods of heightened market volatility.

Broader Implications

The central bank’s active role underscores its commitment to maintaining exchange rate stability, a crucial factor for investor confidence and economic resilience. While the rupee remains vulnerable to global headwinds, including dollar strength and interest rate hikes by the US Federal Reserve, the RBI’s intervention has provided temporary relief.

Looking Ahead

As the rupee navigates a challenging global environment, the central bank’s vigilance in managing forex reserves and market sentiment will remain pivotal. With the rupee trading near all-time lows, sustained interventions may be necessary to maintain economic stability and prevent further erosion in currency value.

This situation highlights the intricate balance the RBI must maintain between supporting the rupee and conserving its forex reserves amid global uncertainties.

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