India Central Bank Turn to Dollar Swap in Bid to Address Rupee Challenges

The Indian Central Bank is reportedly addressing the scarcity of the Indian Rupee, which has been exacerbated by the surge in the value and availability of the U.S. dollar, through the use of dollar swap interventions.

Recent Struggles of the Indian Rupee

The Indian rupee has faced significant challenges recently, driven by a strengthening U.S. dollar and various economic pressures. A surge in the dollar’s value and availability, spurred by higher interest rates set by the U.S. Federal Reserve, has placed additional strain on the rupee.

On Monday, the rupee fell past the 86-per-dollar mark for the first time in history, following a strong U.S. jobs report that intensified pressure from weak inflows and heightened hedging activity.

Contributing Factors to the Rupee’s Decline

1. Weak Portfolio Flows:
   Foreign investors have withdrawn substantial funds from Indian equities. In January alone, over $4 billion was pulled out, adding to nearly $11 billion withdrawn during Q4 2024. These outflows have significantly exacerbated the rupee’s three-month-long downward trend.
2. Decline in Forex Reserves:
   India’s foreign exchange reserves fell to $634.6 billion as of January 3, marking a 10-month low and a decline of $70 billion from their peak in late September 2024. This drop reflects the country’s efforts to stabilize the currency.
3. Central Bank Interventions:
   The Reserve Bank of India (RBI) has taken steps to address the rupee’s scarcity and curb its decline by selling dollars in both spot and forward markets. State-run banks have also been observed offering dollars, likely acting on behalf of the RBI.

The Path Ahead for the Rupee

The recent appointment of Sanjay Malhotra as the new RBI governor has sparked speculation about a potential shift toward a more flexible exchange rate policy. Analysts predict further depreciation of the rupee in the short to medium term.

For instance, ANZ Bank expects the rupee to weaken to 88 per dollar by March, highlighting concerns about its current overvaluation. Unless the RBI announces and implements robust measures to stabilize the currency, the rupee’s decline is anticipated to persist.

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