Reserve Bank of India Pulls Back Rupee from the Brink of 88 Against the Dollar

RBI Intervenes as Rupee Weakens to Record Lows Amid Global Pressures

The Reserve Bank of India (RBI) has successfully intervened in the foreign exchange markets to prevent the Indian rupee from breaching the critical 88-per-dollar mark, reinforcing its commitment to maintaining currency stability. The rupee, which had been under severe pressure due to global economic uncertainty, foreign fund outflows, and rising crude oil prices, saw a sharp decline before the central bank stepped in with targeted interventions, bringing it back from the brink.

As of now, the rupee is trading near 86.80-87.20 against the US dollar, a notable recovery from its near-88 levels seen in recent sessions. RBI’s decisive action included dollar sales in the spot and forward markets, preventing excessive volatility and restoring confidence among investors.

Why Did the Rupee Weaken So Sharply?

The rupee’s decline to near 88 per dollar was driven by a combination of external global factors and domestic economic challenges:

1. Strengthening of the US Dollar

The US Federal Reserve has maintained a hawkish stance on interest rates, leading to a stronger dollar globally.
Higher US interest rates attract foreign investors to the US bond markets, triggering capital outflows from emerging economies, including India.
The Dollar Index (DXY), which measures the dollar’s strength against a basket of major currencies, has been trading above 104-105 levels, further pressuring the rupee.

2. Heavy Foreign Portfolio Outflows

Foreign Institutional Investors (FIIs) have pulled billions of dollars from Indian markets, shifting funds to safer US assets.
In the past three months alone, FIIs have withdrawn over ?50,000 crore ($6 billion) from Indian equities and bonds.
This sharp outflow increases demand for dollars, weakening the rupee further.

3. Surging Crude Oil Prices and Import Costs

Brent crude oil prices have surged above $85 per barrel, leading to higher import costs for India, which relies heavily on oil imports.
Higher crude prices widen India’s trade deficit, as more dollars are needed to pay for energy imports.
This puts further downward pressure on the rupee, making it more vulnerable to depreciation.

4. India’s Widening Trade Deficit

India’s trade deficit expanded to $23.3 billion in the latest monthly data, reflecting higher imports and lower exports.
Key export sectors like IT services, textiles, and pharmaceuticals have seen sluggish growth due to weak global demand, affecting dollar inflows.

RBI’s Swift Action to Defend the Rupee

Recognizing the growing risks of rupee depreciation, the RBI took immediate steps to prevent further losses and restore market confidence.

1. Direct Dollar Sales in Spot and Forward Markets

The RBI actively sold dollars in the forex market to absorb excess rupee supply and prevent speculative attacks on the currency.
By intervening strategically, the RBI ensured that the rupee did not breach the critical 88-per-dollar mark, which could have triggered further panic selling.

2. Swap and Forward Market Interventions

Apart from direct interventions, the RBI utilized swap agreements and forward market tools to manage liquidity.
It conducted USD-INR swaps, helping ease the pressure on the rupee in both short-term and long-term forex markets.

3. Encouraging Indian Corporates to Raise Foreign Currency Debt

The central bank relaxed norms for External Commercial Borrowings (ECBs), allowing Indian companies to raise more funds in foreign currencies, reducing demand for dollars in local markets.
This move helps stabilize forex reserves while ensuring businesses have access to foreign capital.

4. Strengthening Forex Reserves

The RBI’s forex reserves remain strong at around $620 billion, allowing it to intervene decisively without endangering reserve adequacy.
Despite recent interventions, the reserves provide sufficient buffer against external shocks.

Impact of RBI’s Intervention on Markets

RBI’s timely intervention has had several positive effects across financial markets:

1. Rupee Stabilization

The rupee, which was at risk of crossing 88 per dollar, has now strengthened to around 86.80-87.20 levels.
Investor confidence has partially recovered, reducing speculative pressure on the currency.

2. Stock Market Recovery

The intervention has provided relief to equity markets, which were facing pressure due to FII outflows.
Banking and IT stocks, which are sensitive to currency fluctuations, have seen a rebound in recent trading sessions.

3. Bond Market Stability

A weaker rupee raises inflationary concerns, which could have led to higher bond yields.
RBI’s actions prevented excessive volatility in bond markets, keeping yields stable.

4. Reduced Import Cost Pressures

A stronger rupee helps keep inflation under control, particularly for fuel, food, and raw material imports.
This benefits businesses and consumers alike, preventing a sharp rise in domestic prices.

What’s Next? Will the Rupee Face More Pressure?

While the RBI has successfully defended the rupee for now, challenges remain:

US Federal Reserve’s Policy Decisions – If the Fed continues to raise interest rates, the dollar could strengthen further, putting renewed pressure on emerging market currencies.
Oil Price Volatility – If crude oil prices rise beyond $90 per barrel, India’s import bill will increase, leading to fresh rupee depreciation risks.
Global Geopolitical Uncertainty – Ongoing geopolitical tensions, especially in the Middle East and Europe, could disrupt global trade flows and affect investor sentiment.
Trade Deficit Trends – A persistently high trade deficit could require further RBI interventions to maintain stability.

Despite these risks, analysts believe that RBI’s proactive approach, strong forex reserves, and policy tools will help keep the rupee in a stable range of 86-88 in the near term.