FIIs pulled out ₹44,396 crore from equity market in January 2025 due to: Strong US Dollar (Dollar Index > 109), Higher US bond yields (10-year yield > 4.6%) and Expectations of weak Indian corporate earnings
The Indian Rupee weakened, breaching ₹86 per dollar, marking a historic low.
Since Donald Trump’s re-election in November 2024, the Dollar Index has steadily strengthened, impacting emerging market currencies.
The Dollar’s rise highlights global confidence in the US economy amid limited Federal Reserve rate cuts and robust performance.
India’s forex reserves fell for six consecutive weeks, reaching $625.9 billion (10-month low as of January 10, 2025) primarily due to the Reserve Bank of India’s efforts to stabilise the rupee through dollar sales.
Banking system liquidity has remained in deficit since mid-December mainly driven by the Reserve Bank of India’s (RBI) interventions to stabilize the rupee, which have further widened the liquidity deficit.
To address the liquidity deficit, the RBI has implemented several measures, particularly during periods of heightened stress or currency market volatility. These include:
VRR Auctions: Regular Variable Rate Repo (VRR) auctions to inject liquidity and manage short-term imbalances.
50 bps CRR Cut: A 50 basis points reduction in the Cash Reserve Ratio (CRR) to 4% during the December policy meeting to inject additional liquidity into the banking system.
Open Market Operations (OMO): Purchase of government securities to inject liquidity and stabilize money markets.
Daily VRR Auctions: The RBI’s recent decision to conduct daily VRR auctions ensures tighter control over short-term rates and reaffirms its commitment to aligning overnight rates with the repo rate.
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