Teji Mandi Explains: How is RBI controlling Rupee?

Teji MandiUpdated: Friday, March 04, 2022, 04:28 PM IST
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Representative image | Photo Credit: PTI

Russia-Ukraine’s conflict has affected the world’s stock markets and foreign exchange. However, the rupee's volatility is a crucial topic that needs not be overlooked because of the rising inflation. And that’s when RBI comes into the picture. Let’s read!

What’s Happening?

The Reserve Bank of India is our last resort in times of crisis. And guess what? We are in deep trouble. Russia-Ukraine’s conflict came when we were buried in rising inflation, semiconductor shortage, high commodity prices etc. Global crude oil prices and geopolitical tensions are weighing on the Asian currency market. The Indian rupee is seeing wild swings. It has depreciated over 2% since February 24. To control this, the RBI may have sold up $2 billion in the local currency market to stop the volatility in the exchange market. Big banks were seen selling dollars on behalf of RBI in the spot market, said media sources.

On March 8, the RBI will hold a buy-sell auction to manage surplus liquidity in the banking system and enhance the supply of dollars in the exchange market. To support the demand-supply and control inflation, RBI will suck out liquidity and rebalance it with open market operation (OMO) bond purchases to also ease bond yields.

What Does That Mean?

Let’s explain this simply - RBI is the sole custodian of FOREX reserves in India. It maintains it to control the Indian economy. When the RBI wants to increase the value of the Indian rupee, it pumps foreign currency into the market and pumps out Indian money. This shows appreciation of the Indian rupee, which has not been happening lately.

What Lies Ahead?

The RBI will keep a close watch on the currency market since every other good’s cost rises. However, we can't afford a depreciating rupee since it has already lost 1.82% against the US dollar this year, making it the worst-performing Asian currency. Therefore, RBI will monitor the forex market and pump out excess liquidity.

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