RBI holds back US dollar sales in February amid pressure on rupee

The Reserve Bank of India (RBI) abstained from selling any US dollars throughout February, for the first time in nine months. The decision comes amid increasing pressure on the rupee, as expectations of rate cuts by the US Federal Reserve keep pushing back.

The last time the RBI did not sell dollar over a month was in May 2023. The RBI had sold $8.5 billion in the spot market in January 2024.

The central bank purchased $8.5 billion over the month in February to build the foreign exchange reserves and to protect the rupee from further depreciation as the US CPI data for January was higher than expected, said market participants.

India’s foreign exchange reserves have been hitting new peaks for the past seven consecutive weeks. It reached a new peak of $648.56 billion in the week ended April 5, latest data by the Reserve Bank of India showed. The reserves surged by $2.98 billion in the week.

“RBI was intervening in the foreign exchange market both through spot and forwards to contain volatility in the rupee,” said a treasury head at a private sector bank. “Dollar was getting stronger as the data was unsupportive and rate cut was pushed back to June,” he said.

The rupee depreciated by 0.6 per cent in February. Before the release of the US inflation data for January, the first rate cut by the US Fed was expected in March, later it was pushed to June.

Currently, after a slew of unfavourable data, the market expects the US Fed to start cutting rates in the second half of the current calendar year. A segment of the market expects only one rate cut in December.

“The intervention was more to do with keeping the rupee in a range than building reserves,” said a treasury head at another private bank. “The rupee blew up only in April, it was fairly in a range during February and March,” he added.

The central bank was also a net buyer in the rupee forwards market. The net outstanding forward purchases stood at $9.6 billion by the end of February, against $9.9 billion in January.