News

Published: September 18, 2024
Updated: September 18, 2024

RBI Governor Das Tames Rupee Volatility with $689 Billion Forex Reserves

RBI Governor Shaktikanta Das has successfully navigated the complexities of stabilizing the Indian rupee while building a massive foreign-exchange reserve of nearly $700 billion. Under his leadership, the Reserve Bank of India (RBI) has managed to balance rupee volatility, supporting India’s export ambitions, and maintaining economic stability.

Balancing the Rupee and Export Goals

Since taking charge, Das has orchestrated a delicate balancing act—allowing the rupee to decline gradually, supporting Prime Minister Narendra Modi's push to boost exports. While the currency has reached near-record lows of 84 per dollar, inflation and import costs have remained under control, a feat that previous RBI governors struggled to achieve. When the US Federal Reserve recently implemented a significant rate cut, the rupee's movement remained relatively steady, further underscoring the effectiveness of Das’s approach.

A Strategic Stockpile of Foreign Reserves

Das’s tenure has been marked by frequent interventions in the forex market, which have transformed the rupee from one of Asia’s most volatile currencies to one of its most stable. The RBI has bolstered its reserves to $689 billion, a strategy reminiscent of China’s efforts in the early 2000s. This stockpile not only insulates India from sudden capital outflows but also enhances investor confidence in India’s economy, now the world’s fastest-growing major economy.

Support from Global Debt Inflows

The accumulation of reserves has been facilitated by nearly $20 billion in debt inflows, linked primarily to India’s inclusion in JPMorgan Chase & Co’s flagship emerging markets bond index. This has allowed the RBI to mop up foreign currency, while India’s stock market has outpaced Hong Kong to become the fourth largest globally in 2024.

Narrowing Current Account Deficit and Economic Growth

India’s current account deficit has improved, largely due to cheaper oil imports from Russia and the establishment of global service hubs within the country. With the rupee now more stable, the RBI is well-positioned to follow the Fed’s lead in easing interest rates as inflation nears the 4% target.

Risks and Challenges of RBI's Forex Policy

While Das’s policy has effectively shielded India from external shocks, it has not been without criticism. The US Treasury has repeatedly placed India on a watchlist for currency manipulation, and the International Monetary Fund (IMF) has raised concerns that the rupee no longer operates as a fully floating currency. The RBI has disagreed with these assessments, emphasizing the unique challenges emerging markets face in maintaining stability.

Benefits Outweighing Costs

Despite concerns, many economists agree that the benefits of Das’s strategy far outweigh the potential risks. The reserve buildup has made Indian financial assets more attractive to global investors and bolstered the government’s goal of increasing overseas trade in rupees. Furthermore, the gradual depreciation of the currency has helped India adjust to external imbalances and maintain competitive export prices.

Securing India’s Financial Stability

In addition to managing the rupee, Das has also focused on maintaining financial stability. Earlier this year, the RBI restricted a large portion of the currency futures market to curb speculation and prevent arbitrage opportunities. These interventions have helped protect the currency from sudden pressures, further securing India’s economic position.

A Strong Foundation for Future Growth

Governor Shaktikanta Das’s leadership has significantly strengthened India’s economic fundamentals through prudent forex management and strategic interventions. As his tenure nears its end, his successor will inherit a stable currency, a robust forex reserve, and a solid foundation for continued growth. Maintaining this stability will be key to ensuring India’s resilience in an increasingly volatile global economy.