By: Hiren Gandhi
The Reserve Bank of India (RBI) manages India’s foreign exchange market under a Managed Floating Exchange Rate System, where the value of the Indian rupee is primarily determined by market forces of demand and supply. However, when excessive volatility, speculative pressure, or abrupt currency movements disrupt market stability, the RBI steps in to intervene. It is important to note that the RBI does not target any fixed exchange rate; its core objective is to maintain financial stability and protect the economy from sudden external shocks.
The RBI’s intervention in the foreign exchange market is driven by multiple strategic objectives. These include preventing sharp and disorderly movements in the rupee, managing the country’s foreign exchange reserves prudently, minimizing adverse impacts on imports and exports, maintaining investor confidence, and ensuring overall stability in financial markets. For the central bank, whether the rupee is strong or weak is less important than whether it remains stable and predictable.
In practice, the RBI intervenes in the market either directly or through public sector banks. When the rupee comes under sharp depreciation pressure, the RBI sells US dollars to support the domestic currency. Conversely, when the rupee strengthens excessively and begins to hurt export competitiveness, the central bank buys dollars. Beyond the spot market, the RBI also operates in the forward market to influence future expectations and uses forex swaps to manage liquidity conditions. Intervention in the offshore Non-Deliverable Forward (NDF) market and policy guidance to banks, known as moral suasion, are also part of its broader toolkit.
In financial terminology, this approach is described as “Leaning Against the Wind”, meaning the RBI does not attempt to reverse market trends entirely but works to curb excessive speed and volatility. This measured strategy helps prevent panic-driven movements while allowing market forces to function naturally.
As of December 2025, the USD/INR exchange rate has been hovering around ₹89.7–₹89.8, while India’s foreign exchange reserves have risen to approximately $693 billion. Recently, the RBI has sold dollars to prevent a sharp fall in the rupee, while simultaneously allowing a controlled and gradual depreciation. This clearly indicates that the central bank is not trying to artificially strengthen or weaken the currency but is focused on maintaining balance and stability.
In conclusion, the RBI’s intervention in the foreign exchange market serves as a critical pillar of India’s economic defense mechanism. It not only stabilizes the currency market but also positively influences trade dynamics, inflation control, investor sentiment, and overall economic resilience. This calibrated and strategic approach enables India to remain balanced even amid global financial uncertainty.
Secretary — InGlobal Business Foundation (IBF)
Director — ReNis Agro International LLP, Ahmedabad, India
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