How the RBI Defends the Rupee Using $700B in Forex Reserves

The Reserve Bank of India (RBI) employs a multifaceted toolkit to manage the rupee's depreciation against the US dollar. A primary lever is direct market intervention, leveraging its substantial $700 billion in foreign exchange reserves. By selling dollars and buying rupees, the central bank can directly curb excessive volatility. To prevent this intervention from excessively draining liquidity from the banking system, the RBI can neutralize the impact through open market operations, specifically by purchasing government bonds. This sterilization process helps maintain overall financial stability while supporting the currency. Other key tools include adjusting key interest rates to influence capital flows, implementing capital controls like tightening derivative positions, and using moral suasion to guide market expectations.