India's Central Bank (RBI) is reportedly deploying an unusual "unpredictable intervention strategy" to stem a plunge in the rupee. With the rupee falling near a record low, analysts say the move is a compromise aimed at deterring speculative attacks while avoiding the side effects that excessive intervention could cause.
On the 8th (local time), Bloomberg News reported that the RBI has recently been issuing instructions to its dedicated rupee transaction desk such as "sell $100 million every minute," "sell everything until a specific exchange rate level is reached," and "stand down today," with timing and method varying widely. This nonstandard intervention was said to be a deliberate effort to increase uncertainty so market participants cannot read the RBI's pattern. Dealers receive intervention orders via a dedicated line in sealed rooms that are not recorded, and the Central Bank does not disclose even the size of the orders.
The rupee has fallen 4.9% against the dollar this year, the third-steepest drop among major currencies after the Turkish lira and the Argentine peso. A widening trade deficit, a 50% tariff by the United States on India-made products, and foreign capital outflows have intensified downward pressure, while delays in U.S.-India trade talks added to the burden. Even though the dollar strength gauge has fallen more than 7% this year, the rupee has not shaken off its weakness.
RBI Governor Sanjay Malhotra has maintained that the bank will not tolerate speculative declines while also saying it will not repeat the frequent interventions of the previous governor's tenure. Excessive market defense can drain liquidity and reduce foreign exchange reserves, burdening the broader economy. Cornell University professor Eswar Prasad said, "The RBI is closer to trying to smooth excessive volatility than to fixing a particular exchange rate."
The mode of intervention is decided each morning at a Financial Markets Committee meeting at the RBI headquarters in Mumbai. If needed, discussions are held multiple times a day. The RBI sometimes places orders using nonrounded figures such as "$217 million" to disrupt market predictions, and banks participating in the intervention are barred from running their own positions during that time. In the market, some say "speculators hesitate to attack because they cannot predict the RBI."
Defending the rupee is also linked to structural vulnerabilities in India's economy. During the 1991 currency crisis, India had to pledge gold to pay for imports, and it suffered a major shock during the 2013 "taper tantrum." After those experiences, India steadily expanded its foreign exchange reserves, which now stand at $686 billion. That is enough to cover about 11 months of imports.
Under Governor Malhotra, the RBI increased two-way interventions and received an "eased currency management" assessment from the IMF, but continued intervention has reduced foreign assets by about $38 billion since June, and cash in the banking system is being depleted quickly. The RBI recently said it would supply $16 billion in liquidity through bond purchases and FX swaps.
Experts expect downward pressure on the rupee to continue for the time being. In the forward market, bearish expectations for the rupee are strong, so the RBI must respond in both domestic and overseas markets. Some also note that as residual FX swap positions grow, the capacity for additional intervention could be limited.
Governor Malhotra said, "We do not target a specific exchange rate level and leave price formation to the market, but we will curb abnormal volatility." However, with the rupee having breached the psychological threshold of 90 rupees to $1, many expect it will be difficult to restore market confidence through the Central Bank's intervention alone.
A veteran FX dealer said, "The RBI likely has an internal line for when to go into an all-out battle," adding, "Expectations remain strong that the rupee will depreciate in the long term, which could make the Central Bank's response more difficult."