RBI turns to unpredictable interventions as rupee slides
The Reserve Bank of India has adopted a hard-to-predict approach to managing the rupee as the currency weakens to record lows. The move is part of a more active, high-stakes effort to stabilise the exchange rate without signaling a fixed path to the market.
Why unpredictability?
Keeping interventions unpredictable can reduce speculative trading that bets on predictable central-bank actions. By varying timing, size and instruments, the central bank tries to blunt momentum in the currency market and discourage large one-way bets against the rupee.
How the strategy is likely to work
- Spot market operations: occasional buying or selling of dollars to smooth sharp moves.
- Forward and swap tools: using currency forwards or swaps to influence expectations without revealing a fixed agenda.
- Liquidity management: adjusting domestic liquidity to affect capital flows and short-term demand for foreign currency.
- Communication: selective statements that keep markets guessing about the next step.
Risks and trade-offs
Unpredictable intervention is not without cost. Heavy intervention can deplete foreign exchange reserves and may only delay an adjustment driven by factors such as higher global interest rates, a stronger dollar, or widening trade deficits. It can also complicate domestic policy if it conflicts with inflation control or interest-rate goals.
What markets should watch
- Changes in official foreign exchange reserves.
- Shifts in forward exchange-rate premiums and volatility levels.
- Movement in bond yields and capital flows.
- Global drivers like US rates, oil prices and risk sentiment.
For now, the strategy reflects a central bank trying to balance short-term market stability with longer-term economic objectives. Its success will depend on how long it can sustain interventions without undermining other priorities such as inflation control or reserve adequacy.