RBI Injects $12 Billion to Stabilize Rupee Amid Middle East Tensions

Reserve Bank of India Defends Rupee with Estimated $12 Billion Intervention

The Reserve Bank of India (RBI) has taken an aggressive stance to defend the rupee against market volatility triggered by the escalating Middle East war. According to seven bankers, the RBI has deployed an estimated $12 billion to contain the fallout, with estimates ranging from $9 billion to over $15 billion.

The intervention highlights the challenge the RBI faces in managing volatility, which has been exacerbated by the conflict's seventh day and widening across the Gulf. Oil prices have surged by 16% this week, resulting in $2 billion of foreign outflows from Indian equities and prompting importers to increase hedges for near-term payment obligations.

The RBI's intervention comes against the backdrop of India's substantial foreign-exchange reserves, which stand at over $723 billion, one of the largest in the world.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

RBI's Heavy Intervention Focuses on NDF and Spot Markets

The RBI's intervention spanned various markets, including spot, forwards, futures, and non-deliverable forwards (NDF). The bulk of the activity occurred in the NDF market this week. The intervention was particularly heavy on Thursday, when the RBI sold dollars before the local market opened, a tactic it has employed in the past to counter depreciation pressures.

The pre-market intervention tends to have a significant impact due to low liquidity at that time, allowing modest dollar sales to sway the currency sharply while resetting sentiment. The RBI typically needs to continue selling dollars throughout the day to reinforce the price signal and prevent the currency from slipping back.

Rupee Rallies after Intervention

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

On Thursday, the Asian currency rallied by nearly one rupee in the interbank order matching system within a few minutes of the pre-open intervention, moving from around 92.10 to about 91.10 per dollar. Although the rupee trimmed a part of its rally, it was quoting at 91.68 per dollar at 2:00 p.m. IST on Friday.