The Reserve Bank of India's (RBI) sold a net $15bn in the foreign exchange market in December last year to defend the rupee, according to its latest monthly bulletin. This came after a record sale of $20.2bn a month earlier.
The RBI sold $69bn of forex and purchased $53.9bn in the spot market in December. The net short position in the forward market rose to $67.9bn by the end of December, from $58.9bn in November.
"A strong dollar, driven by US economic resilience and trade policy pivots, could exacerbate capital outflows from emerging economies, push risk premiums higher, and intensify external vulnerabilities," RBI staff said in the report.
Earlier this month, RBI Governor Sanjay Malhotra said that the central bank's interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band. The exchange rate of the Indian Rupee is determined by market forces, he added.
Rupee Depreciation & Its Impact
The domestic currency came under pressure following US President Donald Trump's return to office with a trade war threat. Since November 6, 2024, the rupee depreciated by 3.2% against the US dollar.
A weaker rupee makes imports costlier, leading to higher prices for essential goods like crude oil and edible oil.
RBI's move to sell dollars to stabilise the rupee had brought India's foreign exchange reserves down to $631bn at the end of January from a record high seen in $704.885bn in the first week of September in FY25.
The Dollar index rose by 2.75% in December. It measures the strength of the greenback against a basket of six major currencies.
While the RBI interventions helped the rupee to appreciate against a basket of 40 currencies in the last month, the trade-weighted real effective exchange rate (REER) continues to moderate. The REER declined to 104.82 in January from 107.20 in December 2024.
Notably, before REER rose to 108.14 in November, it at 103.66 in January last year.
