Why The RBI Didn’t Buy US Dollars in July 2025? Update On India’s Reaction to America’s Tariffs

Central banks often intervene in foreign exchange markets to smooth volatility, stabilize their currency, and manage external imbalances. The RBI, India's monetary authority, has been an active participant in the USD/INR market, buying dollars when the rupee is appreciating too sharply, and selling dollars when the rupee comes under depreciation pressure.

In July 2025, the RBI did something unusual: it refrained from purchasing any U.S. dollars in the spot market, instead undertaking net sales of dollars. This marks the first month since early 2014 that the central bank took this stance. This article explores the reasons behind that move, what it tells us about its shifting intervention strategy, and what risks and consequences could follow.

Background: RBI’s FX Intervention — Goals and Tools

Before diving into the July data, it is helpful to review how and why the RBI intervenes in foreign exchange markets.
 

1. Objectives of Intervention
   The primary goal is not to fix an exchange rate, but to manage excessive volatility (i.e., “smoothening” rather than defending). As RBI Governor has stated, interventions are aimed at preventing disruptive swings, not targeting a specific rupee level.
   
   At times, interventions also aim to support macro stability: preserving investor confidence, limiting disorderly capital flows, and maintaining an adequate import cover through reserves.
    
2. Instruments Available
    
   • Spot market operations: Direct buying or selling of U.S. dollars in the domestic interbank market.
      
   • Forward and derivatives market: The RBI may engage in forward sales or non‐deliverable forwards (NDFs) to influence expectations without immediately touching spot reserves.
      
   • Sterilization operations / OMOs: To neutralize the monetary impact of FX interventions, RBI can use open market operations, reverse repos etc.
      
   • Forex swaps: The RBI can buy dollars from banks in exchange for rupees now, with an agreement to sell them back later. This gives rupee liquidity without permanently altering reserves.
      
3. Limits and Constraints
    
   • Every dollar sold reduces the RBI’s foreign exchange reserves, so repeated large sales are not costless.
      
   • Effectiveness is context dependent: in deep, liquid markets, interventions may have limited impact on longer-term trends.
      
   • Market expectations, global capital flows, and U.S. interest rates often dominate.
      

Thus, the fact that the RBI did not buy dollars in July 2025 is noteworthy, it suggests a recalibration of its intervention stance in response to evolving pressures.

What the Data Says: July 2025 and Recent Trends

Let us now look at the concrete data around July 2025 and a few preceding months to understand the shift.

Below is a table summarizing key data for July and June 2025, as well as the change in India’s foreign exchange reserves. (Sources: Reuters, Moneycontrol, RBI bulletins)
 

This table encapsulates the shift in RBI’s stance in July 2025 — from usual dollar accumulation to net selling, along with its correlation with the rupee’s sharp depreciation and the resulting decline in India’s reserve buffer.

The table makes clear that July was a departure from the typical pattern in which the RBI buys dollars to build reserves. Instead, it sold roughly $2.54 billion in the spot market, at a time when the rupee lost over 2 percent in value and reserves dropped by nearly $11 billion. 

This suggests a deliberate choice by the central bank to prioritize currency stability amid downward pressure, even at the cost of temporary reserve erosion.

Beyond July, longer-term trends are instructive. In the financial year 2024–25, RBI’s gross dollar sales rose to a record high, nearly USD 398.7 billion. On a net basis, it still sold about USD 34.51 billion in that year. In December 2024 alone, it sold USD 69.05 billion in the spot market.

These recent patterns show that the RBI has been willing to aggressively defend the rupee in a volatile global environment.

Why Did the RBI Refrain from Dollar Purchases in July?

The decision to skip dollar purchases was not arbitrary. Several conjunctural and structural factors appear to have influenced the move.
 

1. Intense downward pressure on the rupee
   The rupee depreciated ~2.23% in July, making it one of the worst months in 2025. In this environment, the RBI likely judged that buying dollars would worsen rupee losses (by putting upward pressure on rupee supply). Instead, selling dollars provided direct support to arrest further depreciation.
    
2. Limited room for further accumulation
   It may be that the RBI was already cautious about augmenting its reserves further, given the uncertain global environment (rising U.S. rates, capital outflows) and the risk of overextending its buffer.
    
3. Preference for defensive flow management over accumulation
   Rather than pursuing aggressive buildup of reserves, RBI appears to be adopting a more defensive posture: intervening selectively when the rupee comes under pressure, rather than accumulating dollars indiscriminately.
    
4. Use of derivatives to manage expectations
   The RBI’s interventions in forward / NDF markets allow it to influence market sentiment without immediately impacting spot reserves.
    
5. Sterilisation constraints and liquidity considerations
   If the RBI had bought large amounts of dollars in July, that would inject rupee liquidity, which would need sterilization to control inflation and interest rates. Given tight liquidity across the banking system, the central bank may have preferred to avoid such complications.
    
6. Macro prudential and capital flow caution
   With global uncertainty (e.g. U.S. policy shifts, geopolitical risks) increasing, the RBI may have chosen to preserve flexibility and avoid overexposure.
    

In sum, skipping dollar purchases in July appears to be a calibrated move reflecting the intensifying pressure on the rupee and the limitations of reserve accumulation under volatile global conditions.

What This Change Implies: Risks and Opportunities

The shift in intervention strategy has both potential advantages and pitfalls. Below, I explore the likely implications.

Stabilization under pressure
By selling dollars in July instead of buying, the RBI has taken a more assertive stance to defend the rupee. This could help deter speculative pressure and send a signal to markets that it is unwilling to let the rupee slide unchecked.

Reserve erosion risk
Repeated net sales, especially in volatile months, can gradually deplete foreign exchange reserves. This reduces the central bank’s buffer for future shocks. The ~USD 10.9 billion drop in reserves in July is nontrivial.

Loss of upside protection
When the rupee strengthens, the RBI often steps in to buy dollars, thereby gaining from exchange rate appreciation. By missing that opportunity (i.e. skipping buys), the RBI forgoes reserve accumulation in favorable periods.

Reliance on forward market tools
The RBI may lean more heavily on forward/NDF interventions, which are less transparent and harder to reverse. This raises questions of credibility and effectiveness over time.

Impact on monetary policy / liquidity
Spot market interventions distort rupee liquidity; the RBI must neutralize these effects via open market operations. The fewer spot interventions it makes, the lower the sterilization burden, which may give it more room to adjust monetary policy.

Market signaling and confidence
A sudden change in intervention stance can affect market expectations, capital flows, and investor confidence. If markets interpret this as RBI losing resolve or reserves, it could backfire.

Threshold for action
The new stance might suggest a higher tolerance for rupee volatility before stepping in. The RBI might now act less frequently, only when volatility becomes “disruptive.”

Over time, the success of this move will depend on whether the RBI can manage the trade-off between rupee stability and reserve sustainability.

Broader Context: External Pressures and the Global Backdrop

It is important to situate this change within the broader external environment.
 

• Global interest rates and U.S. dollar strength: When U.S. rates rise, the dollar tends to appreciate, putting pressure on emerging market currencies like the rupee.
   
• Capital outflows / yield differentials: Foreign portfolio outflows often exacerbate depreciation stress in local currencies.
   
• Trade deficits / oil import bill: A large current account deficit or surging crude prices increase demand for dollars, compounding pressure.
   
• Geopolitical shocks: Tariff threats, global uncertainty, and supply chain disruptions can trigger sudden investor behavior swings.
   

Given these headwinds, the RBI might view a more defensive intervention stance as prudent, steering clear of aggressive accumulation in volatile times.

Conclusion

The RBI’s decision to skip dollar purchases in July 2025, a first in over 11 years, marks a tactical pivot in its foreign exchange intervention strategy. Faced with one of the steepest monthly rupee declines in 2025 and rising global volatility, the central bank chose defense over accumulation, opting to sell USD instead of buying. 

While this may help stabilize the rupee in the short term, it carries risks of reserve depletion, missed accumulation opportunities, and a heavier reliance on forward market tools.

In effect, the RBI seems to be signaling a shift toward more selective, context-driven intervention rather than the continuous accumulation model of prior years. Whether this approach can sustainably balance rupee stability with reserve prudence remains to be seen, especially in a global environment where external shocks are frequent and unpredictable.

 

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