The Reserve Bank of India (RBI) purchased US dollars, with net acquisitions totaling $9.6 billion in September. This marked the central bank’s highest monthly purchase in six months, aimed at absorbing significant dollar inflows into domestic stocks and bonds while curbing excessive appreciation of the rupee. The rupee appreciated by 0.1% in September, driven by strong investor risk appetite following the US Federal Reserve's substantial 50 basis points rate cut.
However, the rupee's gains were limited due to the Reserve Bank of India's absorption of dollar inflows.
Throughout September, the rupee traded within a narrow range, moving from 83.8 to 83.7 per US dollar, as the RBI continued to absorb the incoming dollars. The RBI's foreign exchange reserves also reached a record high of $704.89 billion on September 27.
The RBI has stated that its intervention in the currency exchange market is aimed at curbing excessive volatility, and it does not target specific exchange rate levels. The central bank's routine interventions have led to the overvaluation of the rupee compared to the currencies of its 40 trading partners. According to the RBI's data, the rupee's real effective exchange rate (REER) showed an overvaluation of 7.21% as of October 31, marking its highest level in nearly six years.
Why the RBI Buys and Sells Currencies to Manage the Rupee
The Reserve Bank of India (RBI) buys and sells US dollars and other currencies to manage the value of the rupee. When the rupee is appreciating too much, the RBI buys foreign currencies (like the US dollar) to prevent the rupee from becoming too strong, which could harm exports. Conversely, when the rupee is weakening, the RBI sells foreign currencies to stabilize the exchange rate. These actions help manage currency volatility and maintain macroeconomic stability.
About RR Finance
An integrated financial services group, offering a wide range of financial products and services to corporations, institutions, high-net-worth individuals, and retail investors
Explore a wide range of investment opportunities with RR Finance
Disclaimer : The recommendations, suggestions, views, and opinions expressed by experts are their own and do not reflect the views of RR Finance. This news is for information purposes only, not investment advice.