The Indian rupee on 22 September fell to all-time low of 81.20 against US dollar in early trade on the back of US Treasury yields climbing to fresh multi-year highs and dollar demand from importers. Currently the rupee had suffered its biggest single session percentage decline since February, due to lack of aggressive intervention by the Reserve Bank of India (RBI) and a very U.S. hawkish Federal Reserve rate outlook, traders said.
One of the reasons that RBI couldn’t rescue the fall in the currency was inadequate liquidity in the banking system which is currently in deficit. RBI’s intervention in the spot market could make the case worst for the banking system liquidity amid short-term interest rates going higher.
The Central bank in a an attempt to handle the depreciating rate of rupee, frequently burnout forex. In just eight months between mid-January and mid-September this year, forex reserves have depleted by almost $90 billion, or approximately an average of $11 billion a month. For the week-ended September 16, India’s forex reserves stood at $545.65 billion compared with $634.97 billion in the week-ended January 14.
However, faced with dwindling forex reserves, the Reserve Bank of India (RBI) may not be aggressive in defending the Indian currency and allow it to catch up with other emerging market (EM) currencies that have dropped more.