Answer Posted / bloody idiot

When RBI Sells Dollars in the market
1) Rupees is bought by RBI so supply of Rupees in Market
Decreases and price per US $ remaining the same the demand
for Rupees will increase naturally.
2) Now less Rupees is available for buying US $ in
International Market.
3) In Reverse Supply of US $ to Market in the Exchange
Market increases due to sell by RBI and Hence $ is
available in more supply as compared to pre-sale position.
4) The combined effect of More $ and less Re. results
increase in price of Re. as compared to US $ and there is
overall pressure on the Mkt. to sell $ / Buy Re. in order
to reach Market Equillibrium.
5) Thus it is the forces of Demand and Supply for Foreign
Exchange that determines the position of Rupee in Market.

This policy of RBI is criticised by many in the past, some
of the reasons were
1) Many feel that it deplets Country's Foreign Exchange
Reserves unnecesarrily.
2) Many feel that a Exchange Rate in an Open FE Maket
should be deecided by forces of Demands and supplies in the
market and RBI selling acts as artificial
infusion/injection effect to disturb this process (one org.
tries to determine prics)

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