RBI's interventions reduced drawdown of forex reserves during currency volatility periods: Study

Drawdown of forex reserves during periods of currency market volatilities has reduced over time due to RBI's interventions, a paper by central bank executives has said.

Expectations of volatility have also reduced during the time period of the study, which starts from 2007 and includes the current episode of volatilities triggered by the Russia-Ukraine war.

The RBI has a stated policy of intervening in the forex markets if it sees volatilities, but the central bank never lets out a targeted level. In the current episode, it has successfully defended the rupee depreciating above the USD 80-mark.

The study by Saurabh Nath, Vikram Rajput and Gopalakrishnan S from the RBI's financial markets operations department, which does not represent the central bank's views, said the reserves depleted by 22 per cent during the 2008-09 global financial crisis as compared to only 6 per cent in the current episode following Russian invasion on Ukraine.

''The Reserve Bank has been able to achieve its intervention objectives with progressively lesser percentage drawdown in foreign exchange reserves,'' it said.

On an absolute basis, the 2008-09 global financial crisis led to a drawdown of USD 70 billion in the reserves, which came down to USD 17 billion during the COVID-19 period and stood at USD 56 billion as of July 29 this year due to the Ukraine invasion-related impact.

The paper said some of the important factors affecting volatility are interest rates, inflation, government debt, current account deficit, political stability, dependence on commodities as well as geo-political events, along with liquidity.

It said the Reserve Bank has been able to achieve its objective of keeping INR's exchange rate volatility low, which is reflected in trends of realised volatility, volatility cone and intraday range.