Sharp rupee depreciation forces RBI to spend $77 billion from forex kitty

Indian Rupee

The Reserve Bank of India (RBI) has spent $77 billion from its foreign exchange reserves through intervention in the spot market to defend Indian rupee from falling sharply. Due to this, Indian rupee has remained one of the least volatile currencies among peers.

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 86.3550 against the US dollar on January 27, from 83.8213 against the greenback on October 1, 2024. In the last three months, the Indian rupee has depreciated around 2.97 percent against the US dollar.

The Indian rupee has been on the depreciation path in the last few months due to various factors such as widening trade deficit, rising crude oil prices, a surge in the dollar index after the US Federal Reserve hinted at fewer rate cuts in 2025, India's sluggish growth in Q2FY25, and foreign investor outflows from equities.

To top it, rising Brent crude oil prices also played a major role in depreciation of the Indian rupee.

This has led to the Indian rupee depreciating sharply in the last few months and hitting record lows almost every day against the US dollar.

According to Bloomberg's data, Indian rupee is the third least volatile currency among its Asian peers, after Hong Kong Dollar and Taiwanese dollar, between October and January. Hong Kong Dollar and Taiwanese dollar depreciated 0.25 percent and 2.57 percent, respectively.

The strengthening US dollar exerted depreciating pressure on currencies of emerging market economies in December 2024, leading to a depreciation of 0.7 per cent on a month-on-month basis to the Indian rupee (INR), a RBI report said.

The intervention of RBI 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.