RBI Intervenes to Stabilize Rupee Amid Depreciation Against US Dollar

RBI Intervenes to Stabilize Rupee Amid Depreciation Against US Dollar

Sub : Eco

Sec: External sector

• RBI’s Intervention: The Reserve Bank of India (RBI) stepped in to prevent further depreciation of the Indian rupee, which recently closed at a record low of 84.11 against the US dollar on November 4, 2024. This intervention aims to manage forex reserves and mitigate excessive volatility.
• Reasons for Depreciation:
  • FPI Outflows: October saw Rs 94,017 crore withdrawn from Indian equities by Foreign Portfolio Investors (FPIs). So far, November has witnessed an additional outflow of Rs 4,344 crore, intensifying pressure on the rupee.
  • Geopolitical Tensions and Crude Prices: Ongoing conflicts in the Middle East have pushed up crude oil prices, raising India’s import expenses and impacting the current account deficit, which exerts additional pressure on the rupee.
  • US Treasury Yields and Interest Rates: The US Federal Reserve’s recent 50 basis point (bps) rate cut in September increased the attractiveness of US Treasury notes, which saw a yield surge of 61 bps. This narrowed the spread between US and Indian government bonds, furthering FPI outflows from Indian debt markets.
• Decline in India’s Forex Reserves:
  • India’s forex reserves dipped by $3.463 billion in the week ending October 25, reaching $684.805 billion. This decline reflects the RBI’s intervention efforts to stabilize the currency amidst fluctuating market conditions.
  • US Dollar Strength: Speculation around another 25 bps rate cut by the US Fed has bolstered the US dollar, making it more attractive to investors and thus weakening the rupee.
  • Election Impact on Currency Markets

This combined pressure from FPI outflows, rising crude prices, higher US Treasury yields, and the robust US dollar has created a challenging environment for the rupee, prompting RBI’s intervention to curb its decline and ensure stability in the forex market.

Treasury Yields

Treasury Yields refer to the returns or interest rates earned by investors who hold government debt securities, such as Treasury bonds, notes, or bills.

How Treasury Yields Are Determined:

• Treasury yields are set through auctions.
• The yield, or return, on these securities depends on the price investors are willing to pay relative to the bond’s face value.
• Market forces, such as supply and demand, impact these yields. When demand is high, prices rise, and yields fall; when demand is low, prices drop, and yields rise.

Yield Movements and Interest Rates:

Yield and Price Inverse Relationship: When bond prices rise, yields fall, and vice versa. For instance, if investors buy more Treasuries, prices go up, leading to a lower yield.

Interest Rate Connection: Treasury yields influence and reflect broader interest rates in the economy. If yields rise, borrowing becomes more expensive, which can slow down economic growth. Conversely, lower yields indicate cheaper borrowing, potentially boosting economic activity 

Yield Curve: The yield curve is a graph showing yields across various maturities. A typical curve is upward-sloping (higher yields for longer maturities). However, an inverted yield curve (when short-term yields exceed long-term yields) can signal potential economic recession.