India's Rupee Volatility Exposes Banking System Liquidity Concerns

RBI Prepares to Counter Rupee Volatility

Key Figures:

• $723.08 billion: India's foreign exchange reserves as of February 20
• $2 billion: Drawdown in foreign exchange reserves over the previous fortnight
• Rs 2.10 lakh crore: System liquidity surplus in India
• $80: Crude oil price surpassing mark
• 5.25%: Repo rate in India
• 125 basis points (bps): Cumulative interest rate cut since February 2025

India's Rupee Remains Vulnerable to Global Factors

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The Indian rupee has faced significant pressure due to the ongoing West Asia conflict and elevated crude prices, which have surpassed the $80 a barrel mark. However, experts believe that the Reserve Bank of India (RBI) has the necessary tools to prevent a sharp depreciation in the currency.

RBI's Policy Tools and Forex Reserves

The RBI has a healthy foreign exchange reserve of $723.08 billion as of February 20, which is sufficient to weather rupee volatility. The system liquidity has remained in surplus since the beginning of the year, standing at Rs 2.10 lakh crore. The RBI has been bolstering liquidity through targeted measures, including Open Market Operations (OMO) and USD/INR buy-sell swap auctions.

Liquidity Injection and Interest Rate Cuts

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The RBI has pumped in about Rs 2 lakh crore in the system in four tranches during December and January. In January, it also announced a $10 billion USD/INR buy-sell swap with a three-year tenor. The RBI has cut interest rates since February 2025 by a cumulative 125 basis points (bps), with the repo rate standing at 5.25%.

RBI's Strategy to Mitigate Volatility

The RBI is committed to maintaining liquidity and will continue to intervene in the market to stabilize the currency while ensuring that systemic liquidity remains supportive. The central bank has a fair amount of tools at its disposal, including FX swaps and variable rate repo operations, to mitigate excessive pressures on the rupee.