Tackling the impossible.

"In November 2024, central banks globally added a combined total of 53 tonnes of gold to their reserves," while "the RBI's additional 8 tonnes in November raised its total gold holdings to 876 tonnes. This brings the RBI's year-to-date gold purchases to 73 tonnes, securing its position as the second-largest buyer of gold in 2024, behind Poland." TOI. "Former Reserve Bank of India (RBI) Governor Shaktikanta Das's term was marked by efforts to staunch currency swings, as he sought to impart predictability to foreign investors as well as local exporters and importers." As a result, "the rupee's inflation-adjusted trade competitiveness, or real effective exchange rate (REER), rose to a historic high of 108.14 in November, suggesting an overvaluation of about 8%." ET. The rupee has depreciated from Rs 83.2295 to one dollar on 1 January 2024 to Rs 85.5772 on 31 December 2024. Exchange Rates. One dollar buys Rs 85.83 this morning. xe. com. While the RBI watches the rupee's exchange rate against the dollar, our merchandise trade with China is the highest compared to any other nation. India's goods trade deficit with China rose 13% to $57.83 billion during April-October 2024 compared to $51.12 billion last year. Imports increased to $65.90 billion from $60.01 billion while exports fell to $8.06 billion from $8.89 billion. Mint. No wonder, the rupee tracked the Chinese renminbi which depreciated 3% against the dollar in 2024. CNBC. However, it's the dollar/rupee exchange rate which affects every aspect of the Indian economy, wrote Prof Ajit Ranade. "Whether it is food prices that have an embedded transport fuel or fertilizer cost element, or domestic steel facing import competition, everything is influenced by that rate." "Former chief economic advisor Arvind Subramanian and Josh Felman find that for past three years, the REER has been kept much higher than the average for the previous two decades." This was achieved by the RBI selling dollars. "From February till October 2022, RBI sold or lost a whopping $105 billion of its stock." This achieved two purposes. First, selling dollars at a price higher than its buying cost the RBI made profits which it passed on to the government. In FY 2022-23 the RBI paid Rs 874.16 billion and in 2023-24 it handed over a record Rs 2.11 trillion. Infometrics. By engineering a higher REER the RBI sought to control the cost of imports and thus keep the consumer price index (CPI) from rising too high which would have forced a higher interest rate. Thus the RBI kept interest rates on hold at 4% from May 2020 to May 2022 (bankbazaar) while CPI inflation ranged above 6% (RI) which is the upper limit of CPI inflation allowed by the government (ET). From 15 March 2020 to 16 March 2022, the US Federal Funds rate was 0.00-0.25% (wikipedia), which means that the difference in interest rates between the US and India was a full 4%. From 16 March 2022 the Fed increased its Funds rate to a high of 5.00-5.50% on 26 July 2023 but has lowered it to 4.25-4.50 since 18 December 2024. The RBI too increased its interest rate in tandem with the Fed but by smaller amounts so that it is now at 6.50%, higher by just 2% than the US. "Foreign flows into Indian government bonds are set to decline in 2025, after spiking a record in 2024," as "Overseas investors net bought 1.24 trillion rupees of Indian bonds under the so-called fully accessible in 2024." Reuters. So, what will the RBI do? Keep selling dollars to keep the REER high which will restrain import prices, hurt exports, result in higher trade deficits and give eye-watering payouts to the government? Or will it stop selling dollars which may result in a fall in the rupee, a flight of foreign funds, higher prices of imports and a fall in handouts to the government? All central banks have to face an impossible trilemma (wikipedia) but the RBI may have a quadrilemma. Or even more.