Blitz Bureau
NEW DELHI: The Reserve Bank of India has sent an unmistakable signal to currency markets: while the rupee is allowed to move with global forces, disorderly and speculative slides will not be tolerated. That message came through most clearly on December 17, when the central bank intervened decisively in the foreign exchange market to halt a sharp, one-way fall in the rupee triggered by a surging US dollar and rising global risk aversion.
The intervention, carried out through dollar sales in both the spot and non-deliverable forward markets, helped pull the rupee back from levels close to ₹91 to the dollar. More importantly, it broke a momentum that had begun to look self-reinforcing, with traders building one-way positions against the currency. The RBI’s action was as much about restoring confidence and order as about the exchange rate itself.
This was not an isolated move. RBI data show that the central bank had already been a net seller of nearly $12 billion in October, indicating sustained engagement in the forex market as global financial conditions turned increasingly hostile for emerging market currencies.
Elevated US bond yields, expectations of interest rates staying higher for longer in the US, and geopolitical uncertainty have all combined to strengthen the dollar, exerting pressure on currencies like the rupee despite relatively stable domestic fundamentals.
The RBI’s approach reflects a careful balancing act. It continues to emphasise that India follows a flexible exchange rate regime and does not defend any specific rupee level. At the same time, it has shown a clear willingness to step in when currency moves become abrupt, speculative or detached from fundamentals.
The use of forward and offshore NDF markets alongside spot interventions allows the central bank to influence expectations and curb volatility without an immediate and visible depletion of foreign exchange reserves.
Why does this matter? Currency stability has direct implications for inflation management. A sharply weakening rupee raises the cost of imports, particularly crude oil, fertilisers and key industrial inputs, increasing the risk of imported inflation. At a time when price pressures remain uncertain globally, unchecked currency volatility could complicate the RBI’s broader monetary policy stance.
There is also the issue of capital flows. Foreign investors in Indian equities and bonds are often more sensitive to sudden exchange rate losses than to gradual depreciation. Sharp swings in the rupee can amplify outflows and deter fresh inflows, feeding back into financial market stress. By smoothing extreme movements, the RBI helps maintain investor confidence even as the currency adjusts to global conditions.
Equally important is what the RBI has avoided doing. By intervening selectively rather than predictably, it has resisted creating the impression of a soft peg. Markets that believe a central bank will defend a particular level tend to test that resolve, turning intervention into a costly and ultimately losing battle.
The RBI’s recent actions suggest it is focused on managing volatility, not fixing prices. The objective is not a strong rupee at any cost, but a stable one that reflects fundamentals rather than financial turbulence.