Despite the Reserve Bank of India intervening since July by selling more than $30 billion of its reserves to support the currency, the rupee fell on November 21 to a level of 89.48 against the dollar, indicating a temporary halt to this support. The rupee began the year with a decline, before regaining some strength in the spring, driven by optimism about the possibility of reaching a trade agreement with the United States, but the situation changed in July when President “Trump” announced the raising of tariffs and threatened to punish India for its cooperation with Russia.
In August, a 50% duty was imposed on most Indian exports, in addition to other punitive duties, which led to the rupee falling to unprecedented low levels.
Pressure on the rupee increased after foreign investors withdrew more than $16 billion from Indian stocks until the end of November, amid concerns about high valuations and slowing economic growth.
The central bank follows a policy of intervention only to contain volatility, and not to defend a specific price, despite having reserves of nearly $693 billion. Although it succeeded in temporarily calming the market in mid-October, its intervention at the 88.8 rupee level seemed unsustainable in light of the trade deficit and capital outflows.
Bloomberg estimates that the bank has spent about $33 billion since the end of July, in a move considered an attempt to preserve its reserves in light of the continued trade negotiations between Washington and New Delhi.
The rupee stands today at a crossroads: any improvement in trade relations may ease the pressure on it, while the continuation of the dispute with the United States may push the central bank to deeper and more costly interventions.
