RBI's Record Forex Reserves Can't Stem Rupee's Fall Amid Oil Price Volatility

The Reserve Bank of India (RBI) has reached new heights with its foreign exchange reserves, reaching a record $785.71 billion. Despite this surge, the currency is struggling to find its footing due to ongoing oil price volatility.

Divya Mandaliya, Commodities & Currencies Research Analyst at Anand Rathi Share and Stock Brokers, explains that most of the jump in forex reserves came from the RBI's special NRI deposit scheme (FCNR-B). There, banks swap dollars directly with the RBI instead of selling them in the open market.

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This influx of dollars has contributed to the reserve growth, but it does not necessarily translate into a stronger rupee.

The widening trade deficit due to constant dollar buying by imports for oil and gold is pulling the currency down. India's merchandise trade gap ran wide in recent months, with exports picking up slightly but still facing challenges.

The global demand for dollars is a significant factor contributing to the downward pressure on the rupee. Alongside attractive US bond yields that make investment in Indian markets less lucrative. Ranen Banerjee, Partner and Leader, Economic Advisory at PwC India explains that the exchange rate is determined by the demand for dollars globally.

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The RBI has been intervening to prevent major volatility, but experts believe the currency is unlikely to appreciate much any time soon. The RBI can smooth out sharp fluctuations. However, the underlying factors driving the trade deficit and global demand for dollars will continue to impact the rupee.

According to DK Srivastava, Chief Policy Advisor at EY India, there is an expectation that persistent increases in consumer price inflation in the US may attract dollars from other countries including India back into the US. "With the expectation of a tariff hike linked to continued oil imports from Russia, the RBI may determine the timing of its intervention based on market developments as they evolve," he says.