In its monthly Bulletin published on April 22, the Reserve Bank of India (RBI) revealed that it sold a net total of $1.62 billion worth of foreign exchange in the spot market during February 2025. The central bank purchased a total of $45.03 billion and sold $46.65 billion in foreign exchange over the month. This marks a shift from January 2025 when the RBI had sold a significantly higher amount of $11.14 billion in the spot market.

This sale is a part of the RBI's ongoing efforts to manage exchange rate volatility and ensure stability in India's currency markets. The spot market transactions help regulate the supply of foreign currencies, thus influencing the value of the Indian rupee (INR). The RBI’s actions are often aimed at countering exchange rate fluctuations and ensuring that India maintains sufficient foreign exchange reserves to meet its import requirements.

Indian Rupee (INR) Appreciates in March 2025
Despite ongoing global uncertainties, the Indian rupee (INR) appreciated by 0.5% during March 2025 compared to the previous month. This appreciation was largely driven by foreign portfolio investments (FPI) inflows and year-end dollar receipts from inter-company borrowings. The RBI Bulletin notes that while the INR showed signs of strengthening, there were periods of volatility throughout the month due to the elevated global uncertainty affecting emerging market currencies.

The INR's movement in March 2025 highlights the complex interplay between domestic economic policies, foreign investment flows, and the global economic environment. The rupee’s appreciation is a positive sign for India, as it indicates confidence from international investors and a stronger external sector. However, the fluctuations are still significant enough to warrant continued monitoring by the central bank and market participants.

INR Depreciates in Real Effective Exchange Rate (REER) Terms
Although the INR appreciated in nominal terms, the rupee depreciated by 1% in March 2025 when measured in terms of the 40-currency Real Effective Exchange Rate (REER). The REER is a weighted average of a currency's value relative to a basket of major trading partners, adjusted for inflation differences. The depreciation in the REER reflects India's widening inflation differential with major trading partners, meaning that while the rupee may be stronger compared to other currencies in the spot market, it is relatively weaker when adjusted for inflation and global purchasing power.

This depreciation in REER underscores the challenges faced by the Indian rupee in the global economic context, as it is not only influenced by domestic factors but also by the global inflation dynamics and the policies of India's major trade partners. While nominal appreciation is positive, the REER depreciation points to a longer-term structural challenge that may need to be addressed through comprehensive economic and monetary policies.

India's Foreign Exchange Reserves as of April 2025
As of April 11, 2025, India’s foreign exchange reserves stood at a substantial $677.8 billion, which is sufficient to cover approximately 11 months of imports. The reserves are also equivalent to 94% of India’s external debt as of December 2024, indicating that the country is in a relatively strong position to manage any potential balance-of-payments shocks or external crises.

India’s foreign exchange reserves are a crucial buffer, providing the RBI with the flexibility to intervene in the forex markets to stabilize the rupee when necessary. This level of reserves places India as the world's fourth-largest holder of foreign exchange, reinforcing the country’s financial position and resilience in the face of global economic challenges.

Impact of FPI Inflows and Dollar Receipts
The appreciation of the INR in March 2025 was significantly influenced by foreign portfolio investments (FPI) inflows into the country. These inflows typically signal confidence in India’s economic prospects, and they help to support the demand for the rupee. Additionally, year-end dollar receipts from inter-company borrowings also played a role in the rupee's strengthening during the month.

Such capital inflows are vital for maintaining liquidity in the Indian financial markets, and they help stabilize the INR by balancing the demand and supply for foreign currencies. The government’s policies to attract foreign investments and boost economic growth have played a key role in this scenario.

Global Uncertainty and INR Volatility
Despite the positive indicators, the RBI Bulletin cautioned about the ongoing volatility of the Indian rupee. The rupee’s movements were heavily influenced by elevated global uncertainties, including geopolitical tensions, commodity price fluctuations, and changes in global monetary policy. These factors continue to exert pressure on the rupee and lead to fluctuations in its value, making it essential for the RBI to remain vigilant and ready to take necessary steps to ensure stability.

Conclusion: A Complex Landscape for the INR
The developments in the foreign exchange market in February and March 2025 paint a picture of both stability and volatility for the Indian rupee. While the appreciation of the INR in March was a positive sign, the depreciation in terms of the REER suggests underlying challenges. The RBI’s role in managing the country’s foreign exchange reserves and intervening in the forex markets remains crucial in ensuring the long-term stability of the rupee.

With $677.8 billion in reserves, India is well-positioned to navigate any external shocks, but continued attention to global economic developments will be necessary. The RBI’s careful balancing of domestic and international economic policies will play a pivotal role in the future trajectory of the Indian rupee and the country’s overall economic health.

The Upcoming IPOs in this week and coming weeks are Tankup Engineers.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX.

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst.