Rupee gives up early gains after surprise dollar sales by central bank
The rupee briefly strengthened last month but failed to hold those gains after the Reserve Bank of India (RBI) unexpectedly sold large amounts of dollars. The central bank’s intervention aimed to cool speculative moves against the currency, yet the market reversed course soon after.
What the RBI did and why
The RBI sold dollars from its foreign exchange reserves to increase supply and make it harder for speculators to push the rupee sharply lower. Such interventions are a common tool to curb excessive volatility and protect importers and debt-servicing entities from sudden swings.
Immediate market reaction
- Initial impact: The rupee briefly strengthened as dollar supply rose and speculative pressure eased.
- Subsequent shift: Gains were not sustained, and the currency drifted back as other market forces — including global dollar moves and local flows — regained influence.
- Trading behaviour: Traders cite short-term profit-taking and continued demand for dollars as reasons the recovery faltered.
Why gains didn’t last
Central-bank dollar sales can be effective temporarily, but they may not change underlying drivers such as trade deficits, foreign investment flows, or global risk sentiment. If those fundamentals remain tilted toward dollar demand, intervention needs to be persistent or must be supported by other policy measures to have a lasting effect.
What this means going forward
- For businesses: Currency uncertainty can complicate budgeting for importers and companies with foreign-currency debt.
- For policymakers: The RBI may continue to intervene selectively to manage volatility, balancing reserve levels against market stability.
- For investors: Currency moves are likely to remain sensitive to global rates, crude prices, and capital flows — keeping markets watchful for any further action.
In short, the RBI’s dollar sales provided a short-lived respite for the rupee, but sustaining gains will depend on broader economic and external factors rather than a single round of intervention.