RBI Intervention – But, why is the rupee still near its all-time lows?

The RBI has repeatedly intervened to defend the rupee value in the last couple of years. However, despite earnest attempts, the rupee continue to sink to new lows. What is wrong with the intervention, an what can be done?

Four attempts, but net effect is neutral

RBI has made several attempts to defend the rupee. Firstly, it regularly intervened by selling dollars. That worked, but was coming at a huge cost. Secondly, the RBI started selling dollar forwards. That gave a floor to the rupee, but now comes the unwinding challenge. Thirdly, the RBI tried to hasten repatriation of funds into India, and that also worked only for some time. Finally, the RBI has guaranteed the forex risk on FCNR(B) deposits for a period of 3 months, till September. That led to a surge of $20 billion in NRI deposits, but the rupee is back to an all-time low of ₹97/$. What is going wrong?

Understanding the macro backdrop

To appreciate why the rupee continues to fall, one has to understand the macro backdrop to the rupee weakness. Firstly, India runs a trade deficit overall, even if you offset the merchandise deficit with the services surplus. Oil, electronics, fertilizers and gold are perennial sources of pressure on the rupee. Secondly, FPI flows have turned away since September 2024 as global investors chase more salivating AI-driven stories. India does not really have a presence in that area; unlike Taiwan, Korea, and China. Thirdly, it is still not clear if the relations between Indian and the US are cordial, warm, or hostile. Quite often, it appears to oscillate between these extremes. But there are 2 missing pieces.

First Piece: Concerted action is missing

One of the key learnings in the business of RBI intervention has been that the RBI appears to be taking on one piece of action at a time. Take the case of selling dollar forwards. It would have made a lot of sense in concert with other measures. However, when done in isolation, the very task of unwinding the short positions becomes the problem. Measures like dollar spot selling , dollar forward selling, repatriation, gold import legislation, FCNR(B) deposits etc work best when launched simultaneously. When they are launched in bits and pieces, they quickly get exhausted and the macro pressure starts to build up. It is time for RBI to combine measures, and even consider a sharp rate hike, if required.

Second Piece: Where is the Shock Value?

One of the big lessons of the 2013 intervention engineered by Raguram Rajan was that, it was a major concerted action, and it also had shock value. For instance, if RBI launches an FCNR(B) deposit scheme nearly 3 months after the markets have been demanding it, there is little shock value in the move. A 50-bps rate hike may have its sceptics, but it surely will have shock value at this juncture and force the currency markets to adjust. In a recent report, Reuters highlighted that speculation on the rupee is influenced by the perception of RBI intervention. Clearly, the markets have been unhappy with the reactive approach adopted by the RBI, when markets are expecting RBI to take the lead!