A partial RBI.

On 20 December 2024, "The rupee breached the 85 level for the first time...as the dollar gained ground against most currencies in the wake of the US Federal Reserve indicating that there would be fewer rate cuts in the future than expected." "According to Reuters data, the rupee's drop to 85 from 84 has taken place in about two months, while the decline to 84 from 83 took nearly 14 months." TOI. It has taken just 20 days from 20 December to 10 January for the rupee to find the 86 level as The rupee closed at 85.97 against the dollar yesterday, and "There were reports that the rupee crossed the 86 level in the non-deliverable forward (NDF) market." TIE. "India's foreign exchange reserves fell for the fifth consecutive week to a 10-month low of $634.59 billion as of Jan 3," as "The reserves declined by $5.7 billion in the reported week." "Reserves have fallen by about $70 billion from their all-time high of $704.89 billion in late September." Reuters. The Reserve Bank (RBI) sold dollars to slow the fall from becoming precipitous. As the RBI sells dollars it depletes the supply of rupees in the market. As a result, "Indian lenders have asked the central bank to infuse durable liquidity into the banking system," as "The tightness in liquidity, if sustained, is likely to keep borrowing rates of banks high, potentially impacting lending rates at a time when India's economy is cooling down." "Banking system liquidity has moved into deficit since mid-December, with the daily average deficit at around 1.5 trillion rupees ($17.47 billion) over the last five weeks." Reuters. So, yesterday the RBI "conducted its largest variable repo rate (VRR) auction in nearly a year with a notified amount of Rs 2.25 trillion. Cash-starved banks submitted bids totaling Rs 2.77 trillion, prompting a second VRR auction of Rs 500 billion." FE. The RBI resorts to VRR for short term lending to banks against collateral. This lowers borrowing costs for banks and, in turn, for the economy, wrote Govind Gurnani. These financial contortions are necessitated by the Impossible Trilemma which says that a central bank cannot have a fixed currency exchange rate, allow free flow of currency and also control monetary policy (Investopedia). The RBI tries to partially control each arm of the Trilemma. It forbids Capital Account Convertibility, which would allow Indians to buy or sell any amount of foreign financial assets. As of 2024, the rupee is not capital account convertible. Investopedia. However, Current Account Convertibility is allowed, which means the rupee can be converted to other currencies and vice versa for the purpose of international trade in goods and services. Medium. The RBI only partially follows its mandate to keep consumer price (CPI) inflation at 4% (ET), by holding its interest rate at 4% for 24 months from May 2020 to May 2022 (cleartax) while CPI inflation ran uncontrolled at over 6% (RI) in a partially futile effort to stimulate growth. And partially controls the exchange rate of the currency as it buys or sells dollars to keep the rupee depreciating slowly against the dollar. Why does the RBI exercise its authority only partially? Because, "Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the government of India." rbi.org,in. Hence, it just obeys orders. Yes Massa.