Role of RBI in Controlling Dollar: How RBI Manages USD vs INR

The Reserve Bank of India (RBI) plays a crucial role in controlling extreme fluctuations in the Dollar vs Rupee (USD-INR) exchange rate. While RBI does not fix the dollar rate, it actively manages volatility to protect India’s economy.

Understanding the RBI’s role helps explain why the rupee does not move freely like some other currencies.

Does RBI Fix the Dollar Rate?

No. India follows a managed floating exchange rate system.

• The dollar rate is decided by market demand and supply
• RBI intervenes only to prevent sharp or sudden movements

This means RBI controls volatility, not the exact price of the dollar.

Main Tools Used by RBI to Control the Dollar

1. Forex Market Intervention

RBI buys or sells US dollars in the foreign exchange market.

• When the dollar rises sharply → RBI sells dollars
• When the rupee becomes too strong → RBI buys dollars

This balances demand and supply and stabilizes the USD-INR rate.

2. Foreign Exchange Reserves

India holds large foreign exchange reserves (mainly US dollars).

RBI uses these reserves to:

• Support the rupee during currency pressure
• Pay for imports if required
• Maintain investor confidence

Strong forex reserves act as a shield against dollar volatility.

3. Interest Rate Policy

RBI controls interest rates through repo and reverse repo rates.

• Higher interest rates attract foreign investment
• Lower interest rates may weaken the rupee

Interest rate decisions indirectly influence the dollar-rupee exchange rate.

4. Open Market Operations (OMO)

RBI buys or sells government securities to control liquidity.

By managing liquidity, RBI influences:

• Inflation
• Capital flows
• Currency stability

5. Capital Flow Management

RBI regulates foreign capital flows through:

• FDI and FII guidelines
• External Commercial Borrowing (ECB) rules
• NRI deposit schemes

These measures help manage dollar inflows and outflows.

Why RBI Does Not Keep Rupee Too Strong

A very strong rupee can hurt:

• Exports
• IT and software services
• Manufacturing competitiveness

RBI maintains a balance to support both growth and stability.

Why RBI Does Not Let Rupee Fall Sharply

A sharp fall in rupee can:

• Increase import and fuel prices
• Raise inflation
• Increase foreign debt burden

Therefore, RBI intervenes to prevent panic and instability.

RBI Role During Crisis

During global crises like wars, pandemics, or financial shocks, RBI becomes more active by:

• Supplying dollars to markets
• Ensuring liquidity
• Maintaining financial stability

Example: How RBI Controls Dollar

If USD-INR suddenly moves from ₹82 to ₹86:

• RBI sells dollars from reserves
• Dollar supply increases
• USD-INR stabilizes

Conclusion

The RBI’s role in controlling the dollar is to maintain stability, not to fix the exchange rate. Through forex intervention, interest rate policy, and reserve management, RBI ensures that the rupee remains stable and India’s economy stays protected from extreme currency shocks.