India’s central bank is prepared to sell a sixth of its foreign exchange reserves to defend the rupee against a rapid depreciation after it plumbed record lows in recent weeks, a senior source aware of the central bank’s thinking told Reuters. The rupee has lost over 7% of its value in 2022 and weakened past the psychological level of 80 per U.S. dollar on Tuesday, but the source said the fall would have been far bigger if the Reserve Bank of India (RBI) had not stepped in to stem the decline.
The RBI’s currency reserves have fallen by more than $60 billion from its peak of $642.450 billion in early September, in part due to valuation changes, but largely on the back of dollar selling intervention. Despite the drawdown, the RBI’s reserves of $580 billion remain the fifth largest in the world, giving the central bank confidence in its ability to prevent any sharp, jerky depreciation of the currency.
“They have shown that they will use reserves at will to prevent volatility in the rupee. They have the wherewithal and have demonstrated the willingness to use it,” the source said. “The RBI can afford to spend even $100 billion more if required to defend the rupee,” the source added.
The source said the RBI, as per its stated stance, does not try to protect the rupee or hold it at a certain level but will act to avoid any runaway depreciation in the currency. The RBI did not immediately respond to a query seeking comment.