New Delhi: The Reserve Bank of India (RBI) has sold just over $26 billion of its foreign exchange reserves since the end of September in a likely attempt to stabilize the current decline in the rupee and ensure that the currency remains around of a particular reference point, according to an analysis. by ThePrint has found. That benchmark appears to be 84 rupees per dollar.

However, despite the RBI’s best efforts, the rupee recently fell well below that mark in response to the strengthening of the US dollar due to Donald Trump’s victory in the US presidential election.

ThePrint has learned that the RBI could have been doing both in recent months, first intervening to stop a rapid appreciation of the currency and, more recently, intervening to curb a sharp depreciation.

The mechanism is a function of supply and demand. When the RBI buys dollars, it floods the market with rupees, which reduces the value of the rupee (or depreciates it) due to this increase in supply. On the other hand, when it sells dollars, the RBI reduces the supply of rupees in the market, thereby appreciating its value.

RBI data shows that the rupee almost touched the Rs 84 per dollar mark in September, reaching Rs 83.97 on September 10, a record low. It then appreciated significantly to Rs 83.49 on September 20.

However, this sharp appreciation of the rupee stopped soon after, when the RBI bought dollars and increased its foreign exchange reserves. Between September 13 and 27, India’s foreign currency assets increased by $13 billion to $616.2 billion. Due to these efforts, the rupee fell again to Rs 83.67 on September 27.

The rupee continued to fall (perhaps too fast for the RBI to feel comfortable) until reaching the Rs 83.97 mark again on October 4. This is where evidence again accumulates of the RBI’s intervention to prevent the rupee from falling further by a significant amount.

“During October, foreign institutional investors (FIIs) sold on a daily basis,” VK Vijayakumar, chief investment strategist at Geojit Financial Services, told ThePrint. “A slowdown in corporate earnings growth (as seen in the second quarter of this year) and a market rally are not compatible and that is why there has been aggressive selling by FIIs. And naturally, when FIIs sell and withdraw their money, the rupee will start depreciating.”

In other words, the rupee should have fallen steadily throughout October. However, this did not happen and again coincided with the RBI’s actions.

During the first 10 days of October, the rupee’s decline suddenly stabilized, remaining almost unchanged and below the 84-rupee mark during this period. Notably, coinciding with this period of stability, the RBI sold $14 billion of its reserves between September 27 and October 11.

However, the pressure from FII selling proved too great and subsequently the rupee finally fell below Rs 84 per dollar, settling at Rs 84.06 on October 11, a new all-time low.

From then until the end of October, the rupee exchange rate remained remarkably stable, ending the month at 84.09 rupees per dollar. This is probably because the RBI sold $12 billion more of its reserves during this period.

Overall, over the course of October, the RBI sold a total of $26.4 billion, which probably explains why the rupee remained almost stable throughout the month.

In November, the rupee has depreciated further, mainly due to the strengthening of the dollar (a factor not under the control of the RBI) following Donald Trump’s victory in the US presidential election. The rupee exchange rate stood at Rs 84.37 as on November 8.

“Trump has gone on record to say that he would reduce the corporate tax to 15 percent, which will lead to growth in corporate profits in the United States,” Vijayakumar explained. “And we know that Trump is very pro-business in general. This means that there will be a lot of money coming into the United States, from emerging markets, from China, etc. That is already strengthening the dollar.”

Also read: Shares of public sector banks fall 20-30% from peak as investors face reality of falling profitability

The IMF has criticized India for currency interventions in the past

This would not be the first time that RBI foreign exchange reserves and rupee exchange rate data shows that the central bank has been intervening significantly to stabilize the rupee. In fact, the International Monetary Fund (IMF) last December reclassified India’s exchange rate regime from “floating agreement” to “stabilized” to indicate this higher level of intervention.

The relative flexibility of countries’ exchange rate regimes is graded along a scale, from “independent floating” at one end denoting an exchange rate that moves entirely due to market forces and “non-currency exchange arrangements.” “separate legal tender” at the other end to indicate a system that uses the US dollar as its own currency.

India’s exchange rate regime had been classified as “floating”, indicating relative flexibility. However, the IMF’s change of this classification in December to “stabilized settlement” meant that it felt the RBI was intervening excessively in the forex market.

“Based on the foreign exchange intervention (FXI) data that the RBI releases monthly, the RBI has been using FXI to cushion the impact of external shocks, smoothen market volatility, prevent the emergence of disorderly market conditions (DMC) and opportunistically replenish their foreign exchange reserves,” the IMF said in its December 2023 report.

The IMF acknowledged that central banks can intervene in currency markets to “address disorderly market conditions,” but concluded that the RBI had possibly exceeded normal levels of these interventions.

“However, between December 2022 and October 2023, the rupee-US dollar exchange rate moved within a very narrow range, suggesting that the FXI likely exceeded the levels needed to address the disorderly market conditions,” said the IMF.

The impression of excessive control over the exchange rate is one that most economies try to avoid because it indicates that the government or regulators are not allowing market forces to develop as they should.

At the time, the RBI officially protested this reclassification, arguing that its interventions had not exceeded necessary levels and that the time period the IMF used to analyze currency movements was too short to reach a proper conclusion.

However, RBI officials have confirmed to ThePrint that the central bank does intervene in the forex market, sometimes at significant levels.

“It is the role and responsibility of the RBI to intervene to maintain the quality of international connectivity we have with respect to the currency,” a senior RBI official told ThePrint on condition of anonymity.

“This is not necessarily with the perspective of managing value at a particular level, but certainly in terms of reducing volatility,” he added. “If there are any artificial factors affecting the rupee, then interventions are made to prevent the rupee from appreciating or depreciating sharply as a result.”

The RBI does not officially comment on its foreign exchange interventions.

Also read: Trump-proofing India’s trade policy: ‘Give tariff concessions to US, block Chinese dumping’