Profiting from the trinity.

"India's foreign exchange reserves rose sharply by USD 4.36 billion to USD 693.32 billion for the week ending December 19," "largely driven by the RBI's USD/INR buy-sell swap auction worth USD 5 billion on December 16 to inject liquidity into the banking system." Zee. "The Reserve Bank of India (RBI) net sold $11.87 billion in the forex market in October to arrest the rupee slide against the US dollar," but "The Indian rupee depreciated against the greenback in November, pressured by the strengthening of the dollar, muted foreign portfolio inflows and uncertainty surrounding the India-US trade deal." NDTV. In addition, "Data from the National Securities Depository Ltd (NSDL),..shows that foreign institutional investors (FIIs) have withdrawn Rs 1.6 trillion from Indian equities so far this year." TOI. They would have repatriated this money in their home currencies. "Many Indians looking to transfer money overseas are facing tightened scrutiny from high street banks, demanding to provide detailed proof behind the origin of the funds. This comes as the rupee slides against the US dollar and many rush to move their funds abroad." TOI. So much for internationalisation of the rupee, "aiming to reduce reliance on foreign currencies and position the rupee as a stable international medium of exchange." ET. A currency is a medium of transaction and must be freely exchangeable for it to be used for international trade. For example: "As of December 31, 2024, there were 55.4 billion notes of US currency valuing around $2.32 trillion in circulation, with an estimated half of that circulating outside the US." Investopedia. So, over $1 trillion in dollar notes are being used by foreigners without any restriction by the US central bank. However, despite so much foreign exchange flowing out of India, our reserves have fallen just a little - from $702.28 billion on 24 October (MC) to $693.32 on 19 December. The rupee has fallen from 87.7403 against one dollar on 23 October to 89.7460 today, briefly falling to 90.9489 on 17 December. yahoo. "India and Indonesia have been among the hardest hit," "but the degree of depreciation highlights a gap; the rupee has fallen 4.35% so far this year, compared with a 3.98% decline in the rupiah." MC. On 5 December the Monetary Policy Committee of the RBI cut its policy rate by 25 basis points to 5.25%, while projecting a 7.3% growth rate for the GDP in 2025-26 and CPI inflation at 2%, with core inflation, excluding gold, at 2.6%. ET. "In a surprise move, the RBI on 23 December said it will ramp up liquidity operations next week and in January with large-scale open market operations (OMOs) of Rs 2 trillion and a dollar-rupee buy/sell swap auction, amid tight systemic liquidity and sustained pressure on the rupee. Mint. In short, the RBI is selling dollars to support the rupee, which pulls rupees out from the market, and then buys dollars from banks for a fixed period to inject rupees back into the market. That means it is fighting the 'impossible trinity' which says that any central bank can control any two, but not all three, of - a fixed foreign exchange rate, free capital movement and an independent monetary policy (wikipedia). On top of that the RBI is expected to transfer enormous profits to the government. Last year it transferred Rs 2.68 trillion. newsonair.gov.in. We shall soon find out how much the Budget demands next year. A weak rupee should increase the price of imports, including oil. Inflation could jump if fuel prices spike and high prices could force the rupee weaker. Can the RBI support the rupee, keep its reserves and still pay the government an eye-watering dividend? Can it make the impossible trinity possible? That may make it a candidate for the Nobel Prize in Economics. Wow.