Concerns in capital account trend

RUPEE DEPRECIATION MONETARY POLICY INDEPENDENCE WILL BE TESTED

- RENU KOHLI Senior fellow, Centre for Social & Economic Progress (CSEP), New Delhi

The rupee has been under depreciation pressure since October 2024 despite the Reserve Bank of India's (RBI) large-scale forex market interventions. Foreign exchange reserves fell sharply by $79 billion to $626 billion by January 10, 2025, from a peak of $705 billion on September 27. While part of this could be valuation loss, November 2024 data confirms the interventions were quite significant. The central bank sold $29.5 billion (net) in the spot market and an additional $44 billion in the forward market (maturity up to three months) in October-November. As on November 30, 2024, the outstanding net forward market sales position was a historic $58.9-billion high.

These are massive intervention amounts to ensure an orderly depreciation. It has prompted many economists and market analysts to believe the RBI's interventions have been excessive, and a more appropriate policy should be to allow greater rupee flexibility for absorbing external pressures and avoid overvaluation vis-à-vis many competitor currencies that have been depreciating in response to the hardening US dollar.

We are not sure if that was a fair assessment of the RBI's interventions. One must acknowledge that until September 2024, the central bank was mostly containing appreciation pressures, not depreciation. This was critical to replenish FX reserves sold during the pandemic. Lessons from past episodes suggest it would not have been wiser to let the rupee appreciate during phases of surplus capital inflows that often result in a wider current account deficit (CAD) followed by a sharper exchange rate correction.