RBI ramps up rupee support as rise in forex reserves gives comfort

India's central bank, the Reserve Bank of India (RBI), is intensifying its efforts to support the rupee amid rising foreign exchange reserves. The RBI has recently increased its foreign deposit inflows, shifting to a more consistent pattern of intervention to stabilize the currency. In the past month, the RBI spent $7 billion in a single day intervening in both onshore and offshore markets to prevent the rupee from reaching a record low.

This move comes as higher oil prices add to India's current account deficit and a narrowing interest rate differential with the US siphons capital from Indian markets. Despite over $700 billion in reserves, investors remain skeptical of the rupee's value. The dollar-rupee one-month implied volatility has dropped by about 100 basis points this month, contrasting with a six-basis point fall in global currency volatility.

The RBI's primary goal is to curb volatility rather than alter the rupee's trajectory. The bank's ability to maintain this stance depends on the inflows, which have strengthened its position. However, achieving stability remains a challenge, as the rupee has weakened by 0.8% against the dollar this quarter, compared to a 5.2% decline during the January-March period when the Middle East war impacted investor sentiment towards fuel-importing nations.