On the other hand, when the demand for a currency increases, its value rises. When the supply of a currency increases, its value drops. The value of any currency is determined by demand for the currency as well as its supply. State-run banks are usually instructed by the RBI to sell dollars in order to offer some support to the rupee.īy thus selling dollars in the open market in exchange for rupees, the RBI can improve demand for the rupee and cushion its fall. The aim of the RBI’s policy is to allow the rupee to find its natural value in the market but without undue volatility or causing unnecessary panic among investors. It should be noted that, as a matter of policy, the Indian central bank has usually tried to slow down or smoothen, rather than reverse or prevent, the fall in exchange value of the rupee against the U.S. For instance, if a portion of the reserves are in euros and the euro depreciates against the dollar, this would cause a drop in the value of forex reserves. RBI officials, however, have noted that the drop in forex reserves is due to a fall in the dollar value of assets held as reserves by the RBI. The drop in India’s forex reserves is believed to be largely due to steps taken by the Reserve Bank of India to support the rupee. India’s forex reserves have also dropped below $600 billion, plunging by more than $50 billion since September 3, 2021, when forex reserves stood at an all-time high of $642 billion. The Indian rupee has been witnessing a steady decline this year, losing more than 6% against the U.S.
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