There is no change in the forex policy of the central bank despite several quarters believing that under the new governor Sanjay Malhotra, RBI would not aggressively defend the rupee, said the official, citing discussions between the government and the RBI on the currency slide.
The Indian rupee has weakened about 3.5% against the dollar in the past six months to 86.88 on 7 March, as per data from Bloomberg. By comparison, the Chinese Yuan and the Japanese Yen weakened 1.7% and 0.7%, respectively, during the period.
“The government does not want the currency to depreciate too much,” the official told Mint, speaking on the condition of anonymity. The official said that the government and RBI are hopeful that the rupee will eventually climb back to December levels and that India’s forex reserves are sufficient to defend it.
Also read | Mint Primer: Why it will be a baptism by fire for new RBI Guv
The rupee averaged 84.99 against the dollar in December against 86.27 in January, as per data from RBI.
Queries emailed to RBI and the finance ministry remained unanswered.
Malhotra was initially expected to let the currency depreciate, making it more competitive. However, Mint understands that RBI has decided to continue defending the currency and sticking to its stance of curbing unbridled volatility.
Excessive exchange-rate stability of the past two years, however, may have come at a huge cost to the economy–as Mint reported on 16 January. During this period, the rupee was so stable that the International Monetary Fund reclassified India’s exchange-rate regime to ‘stabilised arrangement’ from ‘floating’ in December 2023.
India’s forex reserves have also fallen $7.7 billion from end-March 2024 to $638.7 billion on 28 February, according to the latest RBI data. The kitty has shrunk $16.2 billion from the beginning of December.
Also read | RBI reduces risk weights on bank loans to NBFCs, MFIs
While India’s foreign currency buffer has doubled in the past 10 years, these are volatile capital flows. As former RBI deputy governor BP Kanungo put it in a speech in 2019: “One also needs to bear in mind that India’s forex reserves are borrowed reserves and not built out of export surplus.”
This year until 7 March, foreign portfolio investors (FPIs) have net sold Indian equities worth $15.9 billion, according to data from the National Securities Depository Ltd (NSDL). In 2024, FPIs were net buyers of $124 million in domestic stocks.
While RBI’s efforts are aimed at curbing volatility, these are being countered by significant foreign outflows, the government official cited earlier said. As the dollar is expected to strengthen, there will be pressure on the rupee, and it will take time for the currency to reach the desired level, the official said.
The past week has been better, though. News agency Reuters reported on Friday that the Indian rupee posted its best weekly gain in over two years as the US dollar declined sharply against major peers, which also helped lift the local unit’s regional counterparts.
Experts, however, believe that given the external environment, the rupee will depreciate.
Also read | Why RBI dialled up dollar sales in the forward market last quarter
“The only thing RBI should try and do is to smooth out the slide and volatility,” said Dhiraj Nim, economist at ANZ Banking Group. “If tariffs do happen on Indian goods from April, then the rupee will have to weaken, and there is no way around it.”
US President Donald Trump recently announced plans to impose reciprocal tariffs on certain trading nations starting April, levying the same rates as they charge on American products.
According to Nim, any aggressive defence of the rupee in the current scenario is unlikely to be fruitful and is not advisable. “That’s because the spot reserves are lower than what we have had in the past, but the forward book RBI has been using to defend the currency has also slipped into a sharply negative short position. If the global environment warrants and the tariffs materialise, then RBI should let the rupee weaken.”
Others said with more than two years of stability like a peg currency, the rupee started weakening against the dollar in the last few months, implying that the central bank let it weaken. “The forex reserve level also suggests that RBI has adopted an approach of leaving currencies largely to market forces,” said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank. The rupee, Tripathi said, has depreciated nearly 5%, a move which always attracts new players as well as giving an opportunity to book profit to those who were bearish on rupee.
And read | Banks get breathing space as RBI defers key proposals to next year
