RBI may sell an additional $100 billion to prevent further decline in Rupee

20 Jul 2022 , 03:07 PM

According to a senior source familiar with the central bank’s thinking, India’s central bank is willing to sell a sixth of its foreign exchange reserves to protect the rupee from a sharp decline after it hit historic lows in recent weeks.

On Tuesday, the rupee plummeted past the crucial mark of 80 against the dollar, losing more than 7% of its value in 2022, but the source said that the collapse would have been much greater if the Reserve Bank of India (RBI) had not intervened to stop the slide.

From its peak of $642.450 billion in early September, the RBI’s currency reserves have decreased by more than $60 billion, mostly as a result of dollar selling but also partly because of value adjustments.

Despite the decline, the RBI still has the fifth-largest reserves in the world ($580 billion), which gives the central bank confidence that it can stop any sudden, abrupt devaluation of the currency.

They’ve demonstrated that they’ll deploy reserves as they see fit to stop rupee volatility. They are able to use it and have shown that they are willing to, according to the source. If necessary to protect the rupee, the RBI can afford to spend even an additional $100 billion, the person continued.

The insider said that the RBI will take action to prevent any excessive currency depreciation rather than trying to defend the rupee or keep it at a specific level, in accordance with its stated policy. A request for comment from the RBI was not immediately met with a response.

The Federal Reserve’s relentless monetary tightening and the ensuing race by investors to sell riskier assets in favour of dollars are driving the broad and persistent U.S. dollar surge that is causing the rupee to fall in line with what is happening internationally.

Given the rise in commodity prices, particularly oil, which accounts for a sizable portion of India’s import bill as a result of the Russia-Ukraine crisis, both India’s trade and current account deficits are destined to get worse.

Since January, the monthly trade imbalance has averaged $25 billion, which suggests that a $100 billion intervention fund to directly counter the demand for dollars would last just four months. Foreign investors have sold roughly $30 billion worth of shares so far in 2022.