RBI Intervenes in Forex Market: Net Sales Drop in December 2024

The Reserve Bank of India (RBI) stepped up its efforts to stabilize the rupee, leading to a net sale of $15.2 billion in foreign exchange during December 2024. This marked a significant drop from the previous month, when $20.2 billion was sold, largely influenced by rising concerns about a potential tariff war under President-elect Donald Trump.

RBI’s Forex Market Activity

In December 2024, the RBI sold $69 billion of foreign currency while purchasing $53.9 billion in the spot market. The central bank’s net outstanding forward sales stood at $67.9 billion by the end of the month, a slight increase from November’s $58.9 billion. These actions were taken to curb excessive volatility in the forex market and avoid sharp fluctuations in the rupee’s value.

RBI’s intervention in both the spot and forwards markets aims to reduce extreme currency swings, which can lead to price pressures in the domestic market. While a weak rupee could help exports, it also makes imports more expensive, particularly essential items like crude oil and edible oils.

Impact on Inflation and Currency Competitiveness

RBI Governor Sanjay Malhotra recently reiterated the central bank’s stance on currency management. According to him, a 5% depreciation in the rupee results in an inflation increase of about 30 to 35 basis points. As a result, the RBI continues to carefully monitor the currency’s movement to maintain a balance between managing inflation and promoting exports.

In January 2025, despite the RBI’s efforts, the trade-weighted real effective exchange rate—the measure of the rupee’s competitiveness—fell to 104.82, down from 107.13 the previous month. This decline suggests the rupee has become less competitive against a basket of 40 global currencies.

Foreign Institutional Investor Activity

The RBI’s interventions also come as foreign institutional investors (FIIs) have been selling off significant amounts of Indian assets. January saw one of the highest monthly outflows in recent years, with FIIs pulling out a staggering Rs 87,375 crore from the Indian market.

These sell-offs have intensified pressures on the forex market, with the RBI stepping in to manage the situation. Although the data for January is still awaited, it’s likely that the RBI continued its intervention to prevent further instability.

Forex Reserves Deplete Amid Market Movements

India’s forex reserves have been impacted by these fluctuations, with reserves falling by nearly $63 billion. As of February 7, 2025, India’s forex reserves stood at $638 billion, down from a peak of $701 billion in October 2024. The decrease in reserves is partly due to the RBI’s active interventions and the outflow of funds from foreign investors.

RBI’s Long-Term Strategy

The RBI’s consistent efforts to stabilize the rupee reflect a larger strategy to maintain control over the domestic economy amidst global uncertainties. While the central bank continues to manage the currency’s movements, its focus remains on ensuring that inflation stays within a manageable range, while also supporting export growth.

The challenges of a fluctuating currency and shifting global investment patterns will likely keep the RBI’s hands full in the coming months. However, the central bank’s interventions, along with its commitment to maintaining a stable macroeconomic environment, are expected to help India navigate these turbulent times.

As the RBI continues to monitor the situation, questions remain: will India’s currency stabilization efforts succeed in the long term? And how will global economic trends shape the future of the rupee and the country’s financial markets? Time will tell.