RBI Intervenes in Forex Market via State-Run Banks to Stem Rupee Weakness Near 95.35 Per Dollar

The Reserve Bank of India (RBI) entered the foreign exchange market on Thursday to curb mounting downward pressure on the domestic currency, Reuters reported, citing four market traders. State-run commercial banks were observed selling US dollars, acting on behalf of the central bank to absorb excess greenback demand.

Dealers characterized the central bank's action as mild, noting that it aimed to smoothen exchange rate volatility rather than defend a specific level. The USD/INR currency pair rose 0.14% to 95.358 per dollar, trading close to record highs of nearly 97 reached earlier in the month.

Drivers Behind the Currency Pressure

The Indian rupee has faced persistent headwinds in recent weeks from a combination of global macro factors and external sector pressures:

• Elevated Energy Costs: International benchmark Brent crude oil traded around $115 to $116 per barrel, placing substantial strain on India's import bill and widening the trade deficit.
• Foreign Portfolio Outflows: Foreign institutional investors have net sold approximately $8.5 billion worth of Indian equities over the past two months, accelerating dollar repatriation.
• High US Treasury Yields: Sustained yields on US government debt have diminished the carry-trade advantage of emerging market assets, drawing capital toward dollar-denominated fixed income instruments.

Defending the 95.25–95.30 Threshold

Treasury heads identified the 95.25 to 95.30 band as a critical resistance zone for the USD/INR pair. Market analysts noted that a sustained breach beyond that threshold could have triggered stop-losses and accelerated dollar purchases, leaving the currency vulnerable to a swift slide toward the 96 mark.

The central bank has actively countered these risks. Estimates show the RBI has deployed roughly $80 billion since June to bolster the rupee through spot dollar sales, forward contracts, and currency swaps. Earlier in the month, policymakers also unveiled measures to shift spot dollar demand away from open markets, such as routing daily purchase requirements of state-run oil refiners—including Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL)—through a designated window.

What This Means for Indian Investors

The RBI's ongoing interventions carry significant implications for domestic market participants:

• Import-Heavy Sectors: A stabilised rupee protects operating margins for sectors reliant on dollar-denominated inputs, notably oil marketing companies, consumer electronics manufacturers, aviation, and chemical producers.
• Imported Inflation and Rate Trajectory: Preventing sharp currency depreciation shields the broader economy from imported fuel and raw material inflation, providing the Monetary Policy Committee with greater room to manage domestic growth without emergency liquidity tightening.
• Equity Market Sentiment: While foreign outflows remain an overhang for benchmark indices, visible central bank commitment to curbed volatility reassures overseas institutional investors against unhedged currency risks.

Backed by substantial foreign exchange buffers that reached record levels above $785 billion in September, the RBI retains ample room to counter speculative attacks, though market participants expect range-bound trading to persist as long as crude prices remain elevated.