Why RB sell dollars to control rupees values?
The Reserve Bank of India (RBI) sells US dollars to control the value of the rupee primarily to prevent it from depreciating too rapidly or becoming excessively volatile. This action is known as forex intervention . Here's a breakdown of how it works and why they do it: 1. The Mechanism : Strengthening the Rupee The rupee's value is determined by the forces of supply and demand in the foreign exchange (forex) market . When the rupee is depreciating (meaning more rupees are needed to buy one dollar), it's because the demand for dollars is high (or the supply of rupees is high). When the RBI sells US dollars: * It increases the supply of dollars in the Indian market. * By increasing the supply of dollars, the price of the dollar falls (relative to the rupee). * Conversely, this action increases the demand for rupees (since traders need to buy the dollars from the RBI using rupees). * The combination of these effects causes the rupee to strengthen (appreciate)...