India's Foreign Exchange Interventions: Navigating Volatile Currents

A study in the Reserve Bank of India's Bulletin highlights the effectiveness of forex interventions in countering exchange rate volatility. It attributes fluctuations mainly to global spillovers affecting portfolio flows. The study notes that careful interventions have lessened the impact on the Indian Rupee amid turbulence.

A recent study, published in the Reserve Bank of India's Bulletin, underscores the significant role of foreign exchange interventions in mitigating exchange rate volatility in India. The study, titled 'Foreign Exchange Intervention: Efficacy and Trade-offs in the Indian Experience,' was led by Michael Patra, the former Deputy Governor of RBI.

The research elucidates that the main driver behind the rupee's fluctuations is the volatility of portfolio flows, exacerbated by global economic spillovers. Symmetric interventions, both in spot and forward markets, have been effective in countering these volatilities, the study finds.

Despite the global economic challenges, including the COVID-19 pandemic and various geopolitical tensions, strategic interventions have succeeded in minimizing the impact on the rupee. However, India's forex reserves have witnessed a recent decline due to these interventions and market revaluations.

(With inputs from agencies.)