Introduction
During financial year 2024-25, the Indian Rupee (INR) experienced notable depreciation against the US Dollar, moving from approximately ₹83 to ₹88 per USD. Unlike historical balance of payments pressures triggered by runaway Current Account Deficits (CAD), this currency adjustment was predominantly driven by capital account volatility and global macroeconomic shifts, even as India's macroeconomic fundamentals remained relatively resilient.
Factors Responsible for the Rupee's Decline
- Sustained Foreign Portfolio Investment (FPI) Outflows: Heavy sell-offs by foreign portfolio investors in Indian equity and debt markets led to capital flight of nearly $14.6 billion in FY25. This was driven by stretched domestic equity valuations, corporate earnings moderation, and narrowing US-India yield differentials.
- Strong Dollar and Global Geopolitical Uncertainties: The US Dollar Index (DXY) remained elevated due to persistent economic strength in the United States and geopolitical tensions. Market expectations of higher tariffs and altered trade policies further channeled global capital into safe-haven dollar assets.
- Real Effective Exchange Rate (REER) Adjustments: Elevated domestic core inflation relative to key trading partners meant the Rupee had remained overvalued on a trade-weighted REER basis. A gradual nominal depreciation was allowed to preserve export competitiveness in global markets.
- Widening Trade Deficit in Key Commodities: Although the CAD remained within sustainable bounds (1-1.5% of GDP), periodic surges in crude oil prices and merchandise import bills heightened immediate dollar demand from domestic importers.
Corrective Measures Undertaken by the Reserve Bank of India
- Active Spot Market Interventions: The RBI transitioned into a net seller of foreign currency, offloading over $31 billion in the spot market to curb disorderly intraday volatility and prevent speculative runs on the currency without targeting a rigid exchange rate.
- Offshore Non-Deliverable Forward (NDF) and Forward Market Operations: To prevent a rapid depletion of physical forex reserves, the central bank heavily intervened in the offshore Non-Deliverable Forward (NDF) and onshore forward markets, taking substantial short dollar positions (peaking near $88 billion in early 2025) to anchor forward expectations.
- Liquidity Sterilization via OMOs and Repos: Large-scale dollar sales naturally sucked domestic rupee liquidity out of the banking system. The RBI deployed fine-tuning operations, including Variable Rate Repos (VRR) and open market operations, to replenish rupee liquidity and keep short-term money market rates aligned with the policy repo rate.
- Strategic Utilization of Forex Reserves: The central bank effectively utilized its strong foreign exchange buffer of approximately $690 billion to provide two-way market comfort, assuring markets of adequate liquidity backstops.
Conclusion
The RBI's multi-pronged approach combining calibrated spot intervention, forward market operations, and liquidity management succeeded in ensuring an orderly depreciation of the Rupee. By absorbing external shocks without exhausting its deep reserve chest, the central bank preserved macroeconomic stability and maintained the INR as one of the least volatile emerging market currencies.