InvestorQ : Do you see the RBI intervening with the rupee falling sharply against the dollar?
diksha shah made post

Do you see the RBI intervening with the rupee falling sharply against the dollar?

Dilmini Mercia answered.
2 weeks ago

The big question in the last few weeks has been how low can the rupee go? To a large extent it has been a constant rebalancing battle between the forex market and the RBI. On the one hand, the RBI has been trying to defend the rupee at various levels. However, the rupee being eventually market driven, has been breaching many of these old levels on a consistent basis. This has forced the RBI to become spasmodic in its support. To the rupee. It becomes all the more important in the light of the recent fall in the rupee.

In the last few weeks, the rupee is down almost 5.2% against the US dollar. The rupee has fallen from a level of 74/$ to 78.1/$ in a rather short span of time. That is a fall of nearly 5.2% in the rupee. The fall in the rupee has been triggered by several factors like FPI selling, dollar strength, limited RBI intervention etc. But if you were to identify the one factor that really put pressure on the INR, it was the oil price surge, which has gone up from $70/bbl to $120/bbl in just few months. That has really spooked the trade deficit.

The question is how much and how long will the RBI intervene? A sharp fall in the rupee makes imports costlier and a sharp rise in the rupee makes exports unattractive. RBI tries to hold a managed range. The problem in last few months has been surge in oil prices, which has taken trade deficit to $24.3 billion in May 2022. RBI has already seen a 9% depletion in forex reserves, so intervention beyond a point is not really possible. In addition, the import cover is down to just 9 months of merchandise imports, so options are limited.