RBI’s forex measures to protect rupee drives bill rates to 3-year high

The Reserve Bank of India’s (RBI) intervention in the foreign exchange market for protecting the Indian rupee seems to be pushing shorter rates to multi-year highs. In recent weeks, the rupee has hit a series of record lows and even breached the 80 mark against the US dollar.

Kanika Pasricha, an economist at Standard Chartered Plc in Mumbai said, persistent FX intervention to cap rupee losses and elevated government cash balance may probably keep liquidity tight and rates elevated in the short term, as per a Bloomberg report.

On Wednesday, the government’s borrowing costs for a three-month Treasury bill jumped to their highest in three years at an auction, while the weighted average call rate, an interbank overnight rate zoomed to a level last seen in 2020, at 5.09%.

Further, in the report, Saugata Bhattacharya, chief economist at Axis Bank said, that government spending has not materialized with New Delhi’s cash balances with RBI estimated at 4 trillion rupees, which is also contributing to the cash shortage.


As per data compiled by Bloomberg Economics, excess banking liquidity dipped to 1.5 trillion rupees, its lowest since 2019 from the 2022-high of nearly 9 trillion rupees, as tax outflows also weighed. That prompted the RBI to do a 3-day repo auction to inject 500 billion on Tuesday.

Pasricha said inflation will remain the RBI’s key priority with a 50-basis-point rate hike likely next week.

On Thursday, at the interbank forex market, the Indian rupee closed at 79.70 (provisional) per dollar up by 21 paise.

RBI’s data showed that India’s forex reserves further declined by $7.541 billion to $572.712 billion in the week ending July 15. Foreign currency assets stood at $511.562 billion, while gold reserves were at $38.356 billion, and SDRs stood at $17.857 billion.

Last week, RBI governor Shaktikanta Das in a conference said, the impact of these overwhelming spillovers on India has been relatively modest. He added, “the movements of the rupee have been relatively smooth and orderly.” He added, “By eschewing sudden and volatile shifts, we have ensured that expectations remain anchored and the forex market functions in a stable and liquid manner.”

At present, inflationary pressures have led to volatile market conditions making the dollar stronger against a basket of currencies including the rupee. To tame inflation, many central banks have aggressively hiked key interest rates. The US Fed is the latest to hike its interest rate by 75 basis points, and RBI is expected to raise rates in the upcoming monetary policy next week.

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