The right response to capital flight

RBI's recent intervention in the forex market was necessary, but it must now ensure the rupee doesn't appreciate further

- JANAK RAJ

The Indian rupee (INR) came under pressure in the last week of September 2024 when foreign institutional investors (FIIs) turned net sellers in India's capital market, resulting in capital outflows. However, to maintain orderly conditions, the Reserve Bank of India (RBI) intervened in the forex market, raising concerns in some quarters about whether it was an appropriate strategy.

FIIs started withdrawing from the Indian equity market from September 25—a day after the People's Bank of China introduced the monetary stimulus. This was soon followed up by fiscal stimulus in China. As equity valuations in China were quite cheap and stimulus measures boosted prospects for a rise in stock prices, FIIs booked profits in India—mainly due to its higher valuations—to invest in China.

The second factor driving portfolio outflows was the disappointing Q2 results from Indian corporations, particularly some well-known fast-moving consumer goods (FMCG) companies, suggesting a weakening of consumption in India. This made valuations of Indian equities look even more expensive, prompting FIIs to continue selling in the Indian equity market.