Indian central bank unloaded at least $8 billion last week to anchor rupee, bankers say

The Reserve Bank of India (RBI) increased its foreign exchange (FX) intervention last week, selling at least $8 billion to strengthen the Indian rupee, according to six bankers. As significant policy-driven dollar inflows had given the central bank more room to support the currency, their interventions helped lift the rupee to a two-month high of 94.2850 on September 3.

The RBI's discounted hedging facility for overseas borrowings by state-run firms and banks, along with a free-of-cost hedging facility for banks to raise overseas FX deposits, attracted over $136 billion in inflows. These inflows likely provided the RBI with more space to conduct substantial interventions, though the estimated scale of dollar sales varied among bankers.

India's central bank could have used the surge in dollar deposits to reduce a record FX forward book, economists suggest. The RBI's aggressive dollar-selling interventions also drained rupee liquidity from the banking system, potentially pushing interbank borrowing costs below the policy rate and hampering monetary policy transmission.

As of August 21, India's FX reserves reached an all-time peak of $740.8 billion, though it has likely surpassed $750 billion since then. The aggressive interventions by the RBI are driven by persistent rupee weakness concerns, with importers stepping up forward purchases to hedge against depreciation while exporters hold back on dollar sales, awaiting better levels.

While the rupee's rebound from a low of 96.96 in May is unlikely to signal the beginning of a broader appreciation cycle, analysts say, Goldman Sachs expects the currency to remain in a narrow range in the medium term, with stronger external balances not likely to spur a sustained upside. The RBI is also anticipated to utilize future inflows to reduce its forward FX liabilities, which economists estimate have likely crossed $200 billion.