RBI expands intervention to support the battered rupee and boost foreign exchange inflows

The safe-haven dollar has ruled against practically every currency, prompting the Reserve Bank of India to propose a number of fresh measures to boost foreign exchange inflows and lessen the rupee’s sharp drop.

The RBI acted late on Wednesday to stimulate foreign currency inflows, allowing foreign investors to buy in short-term corporate debt and allowing additional government securities to be purchased under the fully accessible channel.

The RBI’s actions are further broken down as follows:

• Increasing the $1.5 billion borrowing cap for domestic corporations.
• Reducing the interest rate cap for banks momentarily in order to draw NRI deposits (non-resident Indians).
• Easing the strict regulations put in place for foreign investors in order to preserve financial stability.

These measures are largely intended to stop the rupee’s decline since they would increase demand for the rupee as a means of exchange for purchasing Indian assets denominated in domestic currency.

The rupee has regularly fallen to all-time lows since it passed the 77 per dollar threshold for the first time ever in March, days after Russia invaded Ukraine, despite central bank intervention in the foreign exchange markets, which has involved selling dollars in the spot and futures markets.

The RBI’s efforts and pledges to intervene primarily to stop “jerky fluctuations” have helped to limit the rupee’s rapid drop.

But because the currency is so close to another important psychological level—80 cents on the dollar—the central bank has been forced to step up its efforts to stop the rot in the currency.

According to the RBI statement, “(the) rupee has depreciated by 4.1 percent against the US dollar so far this fiscal year (up to July 5), which is low relative to other EMEs (emerging market economies) and even large advanced economies (AEs).”

It has been determined to implement the measures indicated in the document, the statement said, in order to further diversify and increase the sources of forex funding in order to reduce volatility and dampen global spillovers.