The RBI’s strategic interventions in currency markets range from capital flow movements to switch signals for the exchange rate in the face of the worldwide financial system. A recent study published in the RBI’s monthly bulletin, authored by former Deputy Governor Michael Patra and other economists, underscores that portfolio flows significantly influence exchange rates more than policy rate or inflation differentials.
The study indicates that the volatility arising from capital flows has been mitigated by the RBI’s interventions in both spot and forward markets. This provides a stable framework for the currency, essential for the economic resilience of India. It must be noted that the interventions of the RBI are made in such a way that they “lean against the wind,” that is, to moderate excessive movements in the exchange rate without pursuing a specific target for the currency level.
However, this particular kickback is all the more effective from India lately on the front of the efficacy parameters. The country’s foreign exchange reserves fell to their lowest level for the last ten months’ worth $625.87 billion on January 10, 2025, specifically due to the ongoing market interventions of the RBI to stop the Indian rupee from falling.
Thus, while RBI’s proactive steps are imperative to ensure the currency stability, at the same time, a thin line is required to be maintained. It would not be wise in the long run if RBI depends only on reserve depletion for the support of the rupee. It would be imperative that RBI keeps itself alert with all global financial trends and adopts new strategies from time to time for ensuring effectiveness as well as sustainability in its intervention.