India's Central Bank Intervenes in Forex Market to Curb Rupee Speculation

The Reserve Bank of India (RBI) has intervened in the foreign exchange market to curb speculation in the rupee, according to sources familiar with the bank's strategy.

Rupee's Rally

The intervention has resulted in a surge in the rupee's value against the dollar, with a gain of nearly 1% on Tuesday, its largest increase in over two years. The currency continued to strengthen on Wednesday, climbing to 86.4238.

Reason for Intervention

The RBI's intervention comes amidst heightened currency-related tensions between India and the US, with India facing potential tariffs from the Trump administration. The rupee's rise is seen as a move to defuse these tensions.

Magnitude of Intervention

Sources estimate that the RBI's intervention may have been as high as $11 billion over the past two sessions, a significant amount. The RBI has not disclosed the exact size of its intervention.

RBI's Stance on Intervention

The RBI remains committed to maintaining currency stability but will not target a specific level for the rupee. The intervention is aimed at countering speculative bets and preventing large fluctuations.

Liquidity Impact

The central bank's intervention has led to a temporary shortage of rupee liquidity in the financial system. To address this, the RBI has increased its liquidity injections, including a variable repo auction for 1.94 trillion rupees on Wednesday and a doubling of its bond-purchase plan to 400 billion rupees this week.