RBI’s actions on Indian rupee, domestic liquidity are steps in right direction: CEA Nageswaran

Chief Economic Advisor V Anantha Nageswaran

The recent actions taken by the Reserve Bank of India (RBI) to defend Indian rupee from falling sharply and injecting durable liquidity to the banking system are steps in the right direction, said Chief Economic Adviser V Anantha Nageswaran while addressing press conference on January 31.

“The recent actions taken by the central bank either with respect to the rupee or domestic liquidity are right steps to the right directions,” Nageswaran said.

These comments came when the central bank has been spending dollars heavily in the forex market to defend Indian rupee from falling sharply in the last few months.  Also, providing liquidity support to the banking system when the deficit has touched to Rs 3 lakh crore.

The intervention by the RBI in the forex market increased after the Indian rupee started falling sharply due to various factors, which include sluggish India’s growth, widening trade deficit, rising crude oil prices, and a surge in the dollar index after the US Federal Reserve hinted at fewer rate cuts in 2025.

Due to this intervention, the forex reserves of the central bank have declined by $77 billion in the last three months. According to the RBI data, India's foreign exchange reserves fell to $623.983 billion as on January 17, 2024, as compared to $701.176 billion as on October 4, 2024.

During this period, Indian rupee depreciated to 86.6 against the US dollar on January 31, from 83.8213 against the greenback on October 1, 2024. In the last three months, the Indian rupee has depreciated around 3 percent against the US dollar.

The RBI intervention in the forex market by selling dollar in the spot market has impacted the domestic liquidity in the banking system. Usually, when the central bank intervenes in the forex market, it sells dollars and buys rupee, which removes liquidity from the banking system. The intervention is done through banks, leading to a strain on liquidity in the banking system.

Apart from this, banking system liquidity also got impacted due to heavy tax outflows on account of goods and services tax and advance tax. Also, lower government spending also impacted the liquidity.

This led to liquidity touching Rs 3 lakh crore last week. To address this concern, the central bank has announced few liquidity injection measures such as Open Market Operation (OMO) purchase of government securities, 56-day variable rate repo, and USD/INR buy/sell swap auction.