RBI’s aggressive dollar sales propel rupee recovery

The Reserve Bank of India (RBI) has taken decisive steps to stabilise the rupee, selling at least $4 billion in the foreign exchange market on Monday, 10 February, according to market sources.

The central bank’s intervention comes as the Indian currency faces pressure from capital outflows and uncertainty surrounding US trade tariffs.

Traders indicate that RBI’s total dollar sales may have covered a value between $4 billion and $7 billion, with the Bank aiming to prevent the rupee from breaching the 88-per-dollar mark as it has continued to spiral down. The intervention continued into Tuesday, 11 February, helping the rupee regain strength and pulling it back above the Rs 87 per-dollar level.

A senior foreign exchange dealer at a private bank noted that the move signals RBI’s intent to curb one-sided speculation against the currency.

As a result of these measures, the rupee, which had closed at Rs 87.46 per dollar on 10 February, has appreciated to Rs 86.63. This recovery comes despite a strengthening US dollar index, which climbed from 107.70 on 7 February to 108.40 on 11 February, and broader weakness among other Asian currencies.

Market estimates suggest that the RBI sold over $3 billion on 10 February, with a similar amount offloaded the following day. The aggressive intervention comes amid a tight banking system liquidity situation, raising questions about the central bank’s broader monetary strategy.

Analysts suggest two key motivations behind RBI’s move.

First, the intervention could be aimed at encouraging exporters to convert their dollar earnings into rupees, boosting forex inflows at a time when export activity traditionally rises.

Secondly, the RBI may be looking to contain speculative trading that has led to sharp fluctuations in the rupee’s value, with the currency swinging between Rs 86.50 and nearly Rs 88 per dollar over a short span.

Meanwhile, liquidity conditions in the banking system, which had been in a significant deficit of Rs 1.75 lakh crore last week, have shown signs of easing. According to a report by Kotak Institutional Equities, the deficit narrowed to Rs 0.97 lakh crore due to various RBI measures, including its foreign exchange swap auction, net government spending, and the phased drawdown of the cash reserve ratio (CRR).

However, despite this temporary liquidity relief, analysts warn that continued forex interventions could offset these improvements.

The Kotak report projects that while core liquidity may remain near neutral in February, it is expected to return to a deficit in March, potentially requiring additional liquidity support measures from the RBI.

As the rupee remains under watch, market participants will closely monitor RBI’s actions in the coming weeks to assess the sustainability of the currency’s recent gains.