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22 May 2026 13 views

RBI Currency Intervention Mechanisms

theIAShub
theIAShub
22 May, 2026
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RBI Currency Intervention Mechanisms
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Central bank tools to manage exchange rate volatility and defend rupee stability — testable under Indian Economy syllabus.

Why in News

The Reserve Bank of India (RBI) deployed aggressive spot market interventions and administrative guidance to prevent runaway rupee depreciation amid record lows against the dollar.

Key Facts

  • Spot market intervention — RBI directly sells S. dollars from forex reserves to absorb excess rupee liquidity.
  • Forward market operations — RBI uses forward and swap contracts to manage long-term dollar expectations.
  • Moral suasion — Administrative guidance to state-run banks and corporate importers for immediate dollar hedging.
  • Monetary Policy Committee (MPC) — Can review interest rate hikes to widen yield differential and retain capital. (UPSC Mains Usage: Article on inflation targeting and RBI autonomy under RBI Act, 1934)
  • Collaborative fiscal intervention — Coordination with Finance Ministry for macro checks like 15% gold/silver duty hike.
  • Forex reserve depletion — From $728.5 billion peak to $696.99 billion due to intervention.
  • Imperative hedging — Directive to large importers to lock dollar rates via derivatives.

Quick Revision Box

Term

Detail

Spot Market Intervention

RBI sells dollars from reserves directly

Forward Operations

Swap contracts for long-term liquidity management

Moral Suasion

Administrative guidance to banks/importers

MPC Role

Reviews interest rate hikes to manage capital flows

Fiscal Coordination

Import duty hikes to curb dollar demand

Reserve Depletion

$31.51 billion used in intervention



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