The Reserve Bank of India (RBI), the central bank and regulatory body of India’s banking system, plays a significant role in managing the rupee’s depreciation. Founded as a private entity on April 1, 1935, and subsequently nationalized on January 1, 1949, RBI is owned by the Ministry of Finance and is governed by a 21-member central board of directors headed by the governor. The RBI issues currency, manages foreign exchange reserves, conducts monetary policy, regulates banks and financial markets, and provides banking services to the government and other institutions.
In the fiscal year 2022-23, RBI witnessed a change in its foreign exchange transactions. After purchasing US dollars for three subsequent years, the RBI switched gears and sold 25.52 billion USD in the spot market, where financial instruments are traded for immediate delivery.
Reason for RBI’s Shift to a Net Dollar Seller
This shift was aimed at stabilizing the rupee, whose value can be influenced by the sale or purchase of dollars. Without this intervention, experts suggest the rupee could have potentially depreciated further, reaching 84-85 levels against the dollar.
The country’s foreign exchange reserves also played a role in this development, decreasing from $606.475 billion to $578.449 billion due to valuation losses from an appreciating US dollar and higher US bond yields. To counter the rupee’s falling value resulting from the Ukraine-Russia conflict and the US Federal Reserve’s interest rate hikes, the RBI sold significant amounts of dollars, preventing further weakening.
Impact of RBI’s Dollar Sales on the Rupee’s Depreciation
The RBI’s dollar sales led to significant profits and thus a higher dividend payout to the government. The Central Board of the RBI approved a 188% increase in surplus transfer to the government for the accounting year 2022-23. The rupee depreciated by approximately 8% during this time, falling from around 76 levels on April 1, 2022, to nearly 82 as of March 31, 2023.
Additional Measures to Curb Depreciation of Rupee
While the sale of dollars was effective in stabilizing the rupee, other measures can be taken into consideration. Promoting foreign investments and encouraging Non-resident Indian (NRI) deposits can increase capital flows into the country, while monitoring and intervening in the foreign exchange markets can reduce excessive volatility in the rupee’s value.
Additionally, fostering a favorable business environment and policies that support economic growth and exports, strengthening monetary policy frameworks to effectively manage inflation and maintain stability, enhancing coordination with other relevant government agencies to implement comprehensive strategies for managing currency depreciation, and promoting trade in rupees can all contribute to maintaining the rupee’s stability.
