RBI’s ‘Save the Rupee’ bill has hit over $40 billion already and it could add another $40 billion this year

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The Rupee fell by over 6% against the US dollar this year – but it’s no free fall. The RBI has been doing all what it takes to arrest its fall with an old but effective strategy — the dollar deluge.

And it has cost the Indian central bank a pretty penny — the bill came up to $40 billion, according to data from the RBI website.

Experts believe that RBI has done a good job of reducing the volatility. After touching record lows twice last week, Rupee settled at 78.94 as of July 4.

“The RBI is not really targeting a level – targeting a level won’t work. They are trying to keep the rupee stable by keeping the volatility low. This is something that they have achieved remarkably well,” Anindya Banerjee, vice president, currency and interest rate derivatives at Kotak Securities told Business Insider India.

Banerjee’s comments indicate that without RBI’s intervention, it could have fallen much further. As of now, Rupee’s fall is comparable to that of China’s Renminbi, Malaysia’s Ringgit and Thai’s Baht — and a point to note that these countries have a current account surplus while India has a current account deficit.

“It is important to note that India’s current account balance has been extremely contained between a surplus of around 1% and a deficit of 2% of GDP over the past nine years, while it has posted a balance of payment surplus almost every year in the past decade, except in FY19,” said a report by Motilal Oswal.

And, on an average annual basis, INR weakened every year except FY18. The report says that the current movement of INR is an anomaly and predicts that it could touch 80 against the dollar and come back to 77 in the next financial year. As per JM’s estimates, Rupee could go as low as 82 this financial year.

The dollar hoarding and an endurance test

Anomaly or not, RBI has been preparing for an event such as this by building its reserves – especially last year. Over the course of 2021, RBI built one of the highest forex reserves in the world, crossing the $640 billion mark. For a country that barely escaped a default three decades ago, it’s an important achievement.

RBI’s forex reserves were on track to touch the $700 billion mark, but an unexpected duo of geopolitical concerns and a boil in crude oil prices helped strengthen the US dollar against most of the currencies in the world.

RBI shifted its stance from that of a hoarder to a spender. It has been actively intervening in the forex markets to keep the rupee stable – not too strong and not too weak, experts told Business Insider India.