Why the Indian Rupee is Falling After Central Bank Intervention as Rupee Hits Record Low of 88.80
- The Reserve Bank of India increased its short dollar positions by $4.2 billion in October to combat the rupee's decline.
- High gold imports and fears of new US tariffs have pushed the Indian currency to record lows near 88.80 per dollar.
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| Photo by rupixen on Unsplash |
The Reserve Bank of India has aggressively stepped up its defense of the national currency. New data reveals that the central bank increased its short dollar positions by $4.2 billion in October alone. This marks the second consecutive month of expansion for the RBI's forward book. The move signals a determined effort to shield the rupee from intense market pressure that has persisted for months.
The size of the intervention highlights the severity of the situation. The RBI's short dollar forward book had actually shrunk significantly earlier in the year. It fell from a peak of nearly $89 billion in February to around $53 billion by August. That trend has now reversed sharply. The September data showed a $6 billion jump which was the first rise in six months. This rapid accumulation of short positions indicates that the central bank is no longer content to sit on the sidelines.
Several economic factors are conspiring to drag the rupee down. Heavy gold imports by jewelry firms are sucking dollars out of the local economy. Foreign investors are also pulling their money out at a rapid pace. There is also a looming fear of steep tariffs from the United States on Indian goods. These combined elements pushed the rupee to a record low of 88.80 against the dollar in September.
The battle is not just happening on Indian soil. Bankers report that the central bank has resumed active intervention in the offshore non deliverable forward market. Traders in places like Singapore have spotted the Bank for International Settlements taking positions. This is often a proxy used by central banks to influence currency rates without showing their hand directly. This offshore activity suggests a more sophisticated and multi front approach to currency management.
Market psychology is making the central bank's job much harder. Exporters are hoarding dollars because they expect the rupee to fall further in the coming weeks. Meanwhile importers are panic buying dollars to hedge against future risks. This mismatch in supply and demand creates a self fulfilling cycle of depreciation. The rupee remains within touching distance of its all time lows despite billions in sales by the regulator.
Treasury officials have noticed a tactical shift in how the RBI operates. The current approach appears less rigid than the style seen under former Governor Shaktikanta Das. The bank seems focused on maintaining orderly market conditions rather than defending a specific price point at all costs. They want to smooth out the volatility without burning through reserves too quickly. This strategy helps reduce the immediate drain on banking system liquidity.
The pressure shows no signs of abating as the year draws to a close. One month implied volatility has dropped which suggests the market believes the RBI will keep a floor under the currency. However the fundamental pressures of trade tariffs and global dollar strength remain. Analysts expect the forward book data for October to show even more expansion when it is fully released. The central bank is clearly digging in for a long winter of currency defense.