Rupee depreciation: A triple attack on rupee

A huge selloff by the foreign institutional investors since October 2024 led to an increase in dollar demand in financial markets, putting pressure on the rupee. The measures taken by the RBI to support local currency impacted its forex reserves, which dipped after reaching a record high and the banking system liquidity was drained out.

The rupee closed at 87.50/$1 on February 28, from 83.81/$1 on October 1 — over 4% depreciation in four months. Reserves touched a peak of $704 billion in the week ended September 27, 2024. They stood at $640 billion as of February 21 — a 9% decrease in four months. According to a Nomura report, in early February, RBI net sold $111.2 billion in intervention in the spot and forward market, and was the largest seller of reserves in January among other Asian central banks.

The intervention in the forex market by the RBI drained liquidity from the banking system which has been in deficit since mid-December 2024. RBI took various measures to support liquidity, from a 50 bps cut in CRR to 4% in its December MPC policy, to long tenured variable rate repo auctions and dollar-rupee buy-sell swap.

“RBI is facing the full force of impossible trinity — fixed exchange rate, free capital movement and independent monetary policy,” IDFC First Bank had said in a report in early January.