The rupee hit a record low of 93.28 per dollar on March 20 as oil prices and foreign selling hit together. The RBI is estimated to have sold around $12 billion of reserves in a single week to slow the fall.
The rupee crossed 90 to the dollar for the first time in December. On March 20, three weeks into a war that sent oil prices soaring, it reached 93.28, a new record low. A 3% move in three weeks may not sound dramatic, but for a currency the RBI usually keeps on a slow, steady path, it was the fastest slide in years.
Two forces at once
The first force was oil. With crude above $100, Indian refiners needed far more dollars to pay for the same imports, swelling the current account deficit. The second was capital. Foreign investors sold Indian shares and bonds heavily after the war began, and every rupee they sold had to be converted back into dollars. When the two hit at once, the demand for dollars far outran the supply.
The RBI’s week
The RBI is estimated to have sold around $12 billion from its foreign exchange reserves in a single week, supplying dollars to the market to slow the rupee’s fall. That kind of intervention does not aim to fix the rupee at any particular level. Its job is to stop a fall from turning into a panic, where importers rush to buy dollars before the price rises further and the fear becomes self-fulfilling.
Central banks rarely win fights against the direction of a currency. They can win fights against its speed.
What a weaker rupee does
A weaker rupee makes imported goods dearer, from fuel to phones to foreign university fees, and adds to inflation. It also helps exporters, whose dollar earnings now convert into more rupees. With reserves still close to $700 billion, the RBI has room to keep intervening. The question for the next few months is whether oil falls back or stays high, because the rupee’s path depends far more on the Strait of Hormuz than on anything decided in Mumbai.
Sources: RBI reference rates and weekly statistical supplement; market estimates of intervention.
- The rupee hit a record low of 93.28 per dollar on March 20.
- Oil above $100 and foreign investors selling Indian assets both increased demand for dollars.
- The RBI is estimated to have sold about $12 billion of reserves in one week.
- The RBI aims to slow the fall and prevent panic, not to fix a particular level.
Read this far? You’d like the weekly email.
One email a week, covering exactly this kind of thing. No spam, no stock tips.
