RBI intervenes to shore up the rupee

The Indian rupee made a sharp recovery, strengthening nearly one rupee against the US dollar despite a rising dollar index and weakness in most Asian currencies.The rupee, which had closed at ₹87.46 per dollar on February 10, surged to ₹86.63, even as the dollar index climbed from 107.70 on Friday (February 7) to 108.40 today (February 11).

The sharp move comes as the Reserve Bank of India (RBI) continues to aggressively sell dollars, with market estimates suggesting over $3 billion was sold yesterday (February 10) and a similar amount today.Also Read: Why India’s CEA expects rupee depreciation to slow down

This intervention is happening even as banking system liquidity remains tight, raising questions about the RBI’s strategy. Market participants believe it could be aimed at these two objectives.

One possible reason is encouraging exporters to sell dollars. The January-March period typically sees higher export inflows, sometimes leading to a current account surplus. By strengthening the rupee, the RBI may be nudging exporters to convert their dollar earnings, boosting natural forex inflows.

Another likely reason is to curb speculative activity. The rupee has seen sharp swings, moving from ₹86.50 to nearly ₹88 against the dollar in a matter of days. Such volatility suggests speculative activity, and the RBI’s intervention could be aimed at stabilising the currency and discouraging excessive speculation.What RBI’s rupee intervention means for liquidity

Ordinarily, when the RBI sells dollars, it removes rupees from the system, making liquidity conditions even tighter.

According to a February 10 report by Kotak Institutional Equities, the system liquidity deficit, which stood at ₹1.75 lakh crore last week, has eased to ₹0.97 lakh crore, as a result of RBI’s liquidity support measures.

Also Read: India’s banking squeeze may be fuelling the dollar flight

“Liquidity continued to remain in the deficit zone, but the tightness eased driven by CRR drawdown, RBI’s FX swap auction, and net government spending, more than compensating for excise/customs-related tax outflows.”

However, given the pressure on the rupee, expected RBI intervention may offset the improvement.

“While in February, we estimate core liquidity to remain near neutral to marginally in surplus, we estimate the core liquidity to again turn deficit from March warranting more measures by the RBI then.” Kotak stated in the note.